Stochastic Gaps: Insults and Illuminations on Microcapitation

Stochastic (stō-kăs’tĭk) adj.

  1. Of, relating to, or characterized by conjecture; conjectural
  2. Involving chance or probability

* Disclaimer: The letter is a response to Dave Marcinko of HealthCare Financials who had some pointed commentary regarding my attempt to define a trend I had identified and described as “microcapitation”. This is a lengthy post with written while on a plane ride home from Oakland, CA.


I appreciate your note. If insulting me to the point of provoking a response while impugning my intelligence was your intent, you have accomplished both objectives. I will try to write a more coherent and lucid response to your disjointed commentary.

I minored in economics but am not an economic theorist. I am a trained observationalist with a knack for predicting emerging trends. Both as a board certified emergency medicine physician, and later as an entrepreneur, I was charged with identifying clues that would lead to early diagnosis when treatment can be most effective. I have identified the concept behind micro-capitation to be such a trend which I wrote about last fall.

Since you could not “for the life of me” understand what I was trying to say, let me provide some additional context. Capitation is most often defined as a set fee “per head” for a specific service. In the case of health care, providers are willing to take a set fee for a specific number of patients and manage the care required for those patients within the confines of that set fee. The problem with this model, as it was deployed in the mid-late 90’s, was that this form of capitation transfers probability risk from the insurer to the provider. Probability risk is defined as the actuarial risk that someone will get ill during the year and is the primary function of insurance companies to accept payment (premiums) to assume this type of risk. Provider are not insurers, and they were not savvy enough, did not have enough information, and did not have any systems in place to properly manage this form of risk. Furthermore, providers are not risk-bearing entities and assuming or attempting to manage probability risk was naive. Essentially, the took the money, crossed their fingers, and hoped for the best.

While most railed against capitation; it was not the enemy per se. The enemy was assuming probability risk when really the only variable the doctor can exert control over is technical risk. Technical risk is defined as the risk assumed by the provider in actually delivering the services in accordance with their training and expertise as measured against the standard of care in their area of practice. Physicians can exert significant influence over the technical risk, and in fact, the highly competent physicians learn to manage this so well that they delivery not only technically superior care, but can usually do it for significantly less money as well. This creates a virtuous cycle of innovation – good providers getting better with more practice and experience which increases their reputations and volumes which helps them get better and better.

So the previous model of capitation gave the physician a known lump sum of money to provide an unknown level of care and transferred both technical risk and probability risk to the physician. We all know how that game ended.

The few who did well under this regime were those who actually either inherited or evolved their practices to include healthy patients which allowed the physicians to earn more money by doing less. Any patients who crossed the “capitation line“, were kindly shown the door, denied additional services, given alternative treatments, or some combination of the above. These perverse incentive created capitated death spirals as some capitated practices aggregated very sick patients that required alot of care which dissimulated the capitated pools. By not adjusting for disease severity, this risk skimming and/or transfer made the concept of capitation a non-starter.

The budget concept underlying capitation does have merit, however. Budget driven health systems like the Veterans Administration and Kaiser Permanente have been shown to delivery a very high level of care and to achieve outstanding results. However, drilling down into their success one can see that the budgeting process actually was successful but not for obvious reasons. The budgeting process forced providers to seek cheaper methods of care, which pushed them further back along the health and disease continuum. These organizations found that an “ounce of prevention” was truly worth a “pound of cure“; that preventing the diseases or managing them early on in the process could yield profoundly more effective, less costly, and high quality care.

Some of the preventive innovations weren’t in the treatments themselves, but in the way the treatment was delivered. Multi-disciplinary teams began to emerge (Care Teams); with long term care relationships being established beyond just the traditional physician-patient relationship (medical home); multiple problems were treated in simultaneously in a single visit (care coordination); and accumulated expertise of the care teams began to be applied across many patients for further clinical and financial economies of scale (best practices). As these were systematically applied across populations, supported by robust information systems that allowed meansurement, monitoring, and management of outcomes (information technology), the VA and Kaiser began to achieve the outcomes for which they were, are, and will continue to be appropriately lauded.

However, the VA and Kaiser are both staff model, vertically integrated health care and health insurance organizations. Self contained universes wherein salaried providers don’t have the financial incentives to “churn and turn” patients. They are actually incented to provide holistic, patient-centered care within the context of the life long relationship with the patient. Despite my strong preference for independence and freedom, this model of health care delivers the goods (value based health care).

Unfortunately, less than 20% of health care in the United States is delivered in this way. Most of our care is fragmented, discoordinated, and inefficient. The cottage industry framework has been highly profitable to the powers that currently reign, and any change that will disrupt this much cash flow, will surely have to be cataclysmic. However, that is exactly where the US Health Care system is right now – we are heading toward the chasm – not only in terms of quality but more importantly in terms of spiraling cost that threaten the very foundation of the US economic infrastructure (you thought the recent credit meltdown was bad? Just wait until the health care meltdown hits!).

The painting of this dire picture is to establish the point that the first version of capitation got it wrong (transferred probability risk to providers). However, capitation is not inherently negative, as demonstrated by capitation-like (light?) budgeted models from the VA and Kaiser. Therefore, I conjecture that a newer version of capitation might actually get it right and even be desired to achieve the optimal health care outcomes. Hence, the introduction of one form of “new style” capitation which I called “Microcapitation“.

Microcapitation is a less expansive, hence “micro”, form of capitation. Instead of assuming global probability and technical risk to deliver care, physicians accept probability and technical risk around more discrete “bundles” or “packages” of care. These Care Packages can be comprehensive services around a specific disease condition or specific service that you as the technical provider can define. Examples might be comprehensive care around hip replacements or diabetic care for an entire year. For these conditions the providers put together all the various services, evaluations, and followups that need to be done to deliver the care package “product”. These discrete care packages, provided by either vertically or virtually integrated teams, not only help organize the delivery of care but also concentrate expertise within the teams. High volume providers would develop additional experience, which would enable them to introduce innovations and efficiencies in a classic virtuous cycle. With the additional delivery and outcomes experience, providers would be much more willing to list a set price for a set grouping of clinical services, because for the first time, they could have some confidence in their ability to deliver for that price. Thus, microcaptiation is a form of capitation but at a discrete medical condition level (which should be the lowest common unit of care delivery that we should measure).

Clearly these care packages will require intelligence built into them in terms of their specifications, but they are definable, controllable, and limited set of clinical activities in which providers can, with confidence, provide services for a set fee. Microcapitation can be a useful new tool particular in the creation of a health care marketplace. Microcapitation around specific medical conditions also provides a manageable unit of health care delivery, an appropriately sized clinical bite in which measurement, monitoring, and healthcare outcomes to be reported, compared, and ultimately consumed in a healthcare marketplace. No need to make up examples, the experiment is already been live in Minneapolis for 4 months and will soon be opening in Seattle.

Microcapitation is not sub-capitation as you define it. Subcapitation is physicians opting out of providing care for specific conditions and having some other sub-contractor (provider) fill in that gap. Microcapitation is a way for any provider any where to create a discrete unit of care provision (comprehensive care for that specific medical condition) and assume the technical and financial risk for the outcome. By reducing the size of the capitated risk from an patient panel to a discrete condition (wherein the physician controls the conditions and hopefully heavily influences the outcome of the services delivered), microcaptiation provides the appropriate alignment of risk and reward for both the provider and the patient. Furthermore, providers have the opportunity to be creative in the way they deliver the service, how they market it, how they measure success, and ultimately how they deliver better outcomes.

Again, the best example of microcapitation model and philosophy can be seen at Other forms of capitation are also emerging, most notably the work being done by Alan Gorrol with his Comprehensive Payment for Comprehensive Care Initiative (risk adjusted/performance based capitation).

Thank you for the offer to expand these theories in other mediums. While I am always happen to share my ideas, I happen to find this medium credible enough.

Definitely not related,


Scott Shreeve, MD
Crossover Healthcare
(949) 235-9375

PS – And by the way, I did not the glaring inconsistency of claiming to be “new wave” while wearing a bow-tie (Does not compute!)


1. Emery D. Value-based formulas for purchasing–PEHP PEHP – Planet Earth Home Page
PEHP – Public Employee Health Plan
‘s designated service provider program: value-based purchasing through global fees. Managed Care Quart 1997;5(1):64-72.


Scott, et. al.,

I re-read with interest your philosophy on “micro-capitation”, and am pleased that there are-foreword thinking folks like you, out there.

Currently, we are crafting a paper on capitation economics for a journal and wondered if you have fleshed out your ideas a bit more? We would be delighted to reference you, and your new term, if you might more pragmatically assist us to understand concept with samples, illustrations, use, potential use, etc.

The bit/byte concept is intriguing, but there are all sorts of stochastic gaps left in your theory, which I can not find on the net; not withstanding the financial.

For example; liability, pricing, continuity of care, leadership, etc.

Most importantly, your small unit condition package concept sounds like a FSS idea, but with more drill-down.

Or, could it just be a “sub-capitation” system, as described in the scenario, below.

Sub-capitated Contract:

The often-contentious dilemma of “carve-outs” from capitated managed care contracts is abating in some parts of the country, just as it is accelerating in others.

Under this scenario, medical services or products such as surgery, trauma, physical therapy, immunizations, certain tests, wound care, or prosthetic devices may be excluded from a managed care contract in favor of another, often “sub-capitated”, provider.

However, if your medical organization is contemplating a sub-capitated contract, consider the following scenarios.

For example, an orthopedic group notes that hand surgery is listed in a new capitation contract that it is considering.

The group is not comfortable with such surgery and they ask that these services be excluded. Since the contract provider will not exclude the surgery, the orthopedist group either has to accept it and perform unfamiliar surgery, or reject it.

SCOTT: Is your idea here a third option in this case? If so, please explain in detail. If not, please explain how it is new?

Thus, the following are conditions considered important for carved or sub-capitated risk contracts:

• equivalent risk for the provider and sub-capitated specialist;
• fixed expenses for the sub-capitated specialist;
• predictable and low cost of care, per specialty episode;
• high episodes of specialty care (not unusual or unpredictable events);
• definable and understood responsibilities of the specialist;
• profit and cost savings potential for both the referring and specialty provider; and
• existence of re-insurance, etc.

IOW: What I am trying to determine here – is if your micro-capitation concept is a real emerging philosophy, or merely the disorganized rantings of another frustrated doc?

For the life of me, I still can’t understand exactly what you are trying to say. Sorry.

Maybe it is me, after all.

My Bad!

Please advise if you wish to promote and expand your theory in a more credible print or e-venue; after more thought.


Dave Marcinko
Atlanta, GA USA



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3 responses to “Stochastic Gaps: Insults and Illuminations on Microcapitation

  1. Wow, serendipitous. I’m winding up a quick blog pointer to this piece (and your previous one) as it frames a discussion I’ve been pushing in the pediatric world for the last year or so – enough that the AAP’s SOAPM committee has asked me to write a piece about it in their newsletter.

    In a nutshell, I have worked with a number of pediatric practices who are consciously (and unconsciously) moving towards offering microcapitation solutions to their patients. I suspect that the HDHP model will greatly contribute to this.

    I also think there is an important benefit to the microcap concept that benefits preventive care in particular: by paying for the care more directly, patients are less likely to skip those important preventive visits. In pediatrics, once the imms stop, parents stop taking the physicals seriously (look at the 6-11yos in a pediatric group). If your well care were care-packaged for you directly, you’d be more likely to consume it and appreciate it.

    And skip the middleman.

  2. Pingback: Microcapitation: A Case Study « Crossover Healthcare

  3. Pingback: Return of Microcapitation: Condition Specific Capitation Payments « Crossover Healthcare

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