Capitation pricing: adjusting for prior utilization and physician discretion.

As the number of Medicare beneficiaries receiving care under at-risk capitation arrangements increases, the method for setting payment rates will come under increasing scrutiny. A number of modifications to the current adjusted average per capita cost (AAPCC) methodology have been proposed, including an adjustment for prior utilization. In this article, we propose use of a utilization adjustment that includes only hospitalizations involving low or moderate physician discretion in the decision to hospitalize. This modification avoids discrimination against capitated systems that prevent certain discretionary admissions. The model also explains more of the variance in per capita expenditures than does the current AAPCC.