American Journal of Law & Medicine

The evolution of physician credentialing into managed care selective contracting.(Health Care Capitated Payment Systems)


In a field littered with analogies, health care in the mid-nineties is best characterized as an enterprise caught in the violent cross winds of a tropical storm known as managed care. Like a series of hurricanes, managed care has reshaped the landscape of health care delivery in drastic and unpredictable ways. While the forces of managed care have increasingly altered more health care markets, others are only beginning to feel the winds of change. As managed care overtakes fee-for-service (FFS) medicine, profound alterations in health delivery are occurring which affect every aspect of American health care.(1)

Particularly noteworthy is the use of capitation as a primary method of reimbursement. The ramifications of capitated health care are broad and warrant exploration from several vantage points. One basic concern in capitated health plans and managed care is the effect of new payment incentives on physician evaluation for purposes of credentialing. This Article focuses on managed care credentialing--the process of appointing, reappointing, and delineating clinical privileges--from a legal perspective. While the Article centers on the link between capitation and credentialing, it has broader applicability in that the same physician evaluation mechanisms in capitated settings are found in discounted FFS arrangements as well. The piece provides a brief overview of capitation and credentialing, and a discussion of trends that have altered hospital medical staff credentialing processes. Later sections analyze the regulation of managed care credentialing, organizational liability for inappropriate credentialing, including a consideration of the impacts of the Employee Retirement Income Security Act (ERISA), and physician rights in the new environment of capitated plan credentialing.



Capitation is more than a buzzword, it is a cornerstone of the health care industry octopus of the nineties, for its presence cannot be easily ignored and its expanse is broad. Simply put, capitation is a system of reimbursement based on a flat payment, generally calculated on a monthly basis.(2) It has been argued that capitation best lends itself to integrated health systems, with a broad base to distribute risk and a high patient volume; nonetheless capitation is being applied to providers at all levels of the health care delivery system. As yet, capitation has not surpassed FFS reimbursement, but it is likely to become the dominant form of payment. Public and private payers alike see capitation as the primary vehicle to control costs by setting limits on payment, and shifting the financial risk to the health providers.(3)

Like any complex development, capitation can be viewed in various ways. A thorough analysis is difficult because capitation is a payment system whose use on a large scale is relatively new and like managed care, is a work in progress. It is unlikely that capitation will ever totally replace FFS medicine, and it seems reasonable to expect that different capitation payment schemes will evolve from those currently in use.(4) In some health care markets, practitioners and institutions are heavily capitated, but nationally capitation is not yet the dominant form of reimbursement. Even though most providers are not totally capitated, as clinicians and institutions obtain a larger percentage of payments through capitated health plans, significant changes in medical practice will occur.

A logical and primary vantage point from which to assess capitation is a financial one. When exploring capitation as a payment system one quickly realizes that it is more than a process of providing a set payment per patient on a monthly basis. Establishing payment rates and negotiating capitated agreements involve detailed and complex financial assessments.(5) Appreciation of how capitated rates are set by payers requires a thorough understanding of health care costs and patient utilization patterns at a specific provider and market level.(6) In negotiating capitated contracts providers need to know their average fees, utilization rates, and income on a per capita basis, factors which physicians, until recently, have not routinely collected.(7) There is a growing body of literature and an expanding number of consultants dealing with the financial nuances of capitation at all stages of the reimbursement process. Both payer and practitioner strategies will vary with the maturation of capitated systems.

On the acute care level, capitation works in some respects like prospective payment in that hospitals know in advance what set amount they will receive per capitated life. Unlike prospective payment, the hospital must view capitation collectively to determine if its total capitated payments can support inpatient operations. A clear impact of capitated payment schemes is that hospitals experience dramatic decreases in inpatient lengths of stay.(8) In situations where institutions are fully capitated, their interests extend beyond the acute care setting, and it becomes a hospital's responsibility to place patients in the most appropriate, cost-effective treatment settings, even if that means placement outside the acute care facility.(9) In theory, the fully capitated hospital can act as a vehicle to ensure patients a continuum of appropriate care, but in reality it is more a matter of deciphering the least costly alternatives.(10)

While capitated physicians do not necessarily have a lock on judicious medical practice, capitation clearly shifts the incentives doctors have to a more conservative management of patient care.(11) Capitated physicians need to approach medical care from an expansive point of view by striving for quality of care in an environment where clinical decisions must be weighed against questions of appropriate resource utilization. In a capitated practice environment, clinical practice guidelines become essential practice aids, and quantifiable outcome measures serve as a check on the efficacy of individual and group practices.(12) The capitated physician is rewarded for preventing illness, so in theory, prevention, patient education, and screening should be far more important than in FFS settings.(13)

Perhaps the most interesting aspect of capitation for physicians is that it shifts the balance of power between primary care and specialist physicians. Under capitated medicine, the primary care physician, the so-called gatekeeper, generally bears financial risk, and decides what, if any, specialty services should be provided.(14) Payment to specialists comes from a referral pool, and is usually made on a FFS basis. In such an arrangement, the specialist physician is dependent on primary care doctors who do not want to be labeled as triage artists and be penalized for excessive referrals.(15) Capitated systems have dramatically cut the need for medical specialists at a time when there is a recognized surplus of specialists, yet a dramatic shortage of primary care physicians. Managed care organizations (MCOs) project significant reductions in the use of specialists.(16)

In certain areas, specialists and subspecialists are becoming capitated--requiring these doctors to follow much more conservative approaches to treatment.(17) Some MCOs are reversing the capitation trend--capitating specialists and subspecialists, but reimbursing primary care on a FFS basis, with the goal of cutting specialty costs and avoiding inappropriate services at the primary care level.(18) Specialist capitation is difficult to implement because it requires assigning more covered lives than in primary care, and the nature of care at this level entails more costly procedures and tests.(19) In some plans, specialists and subspecialists are paid on a modified FFS basis with a portion of the payment placed in a risk pool; and if utilization goals are realized, the payments are returned to the physicians.(20)

Not only does capitation motivate more conservative patient management, but it also expands primary care medical practice. Primary care physicians are being pushed to perform medical procedures that routinely fall within the purview of medical specialists.(21) In some instances, capitation arrangements require primary care physicians to perform procedures and tests which they may have never done before.(22) The scope of primary care practice has been expanded by the need of capitated plans to limit utilization of high cost providers, and this utilization may in fact result in more appropriate uses of primary care physicians. The obvious downside of expanding primary care is the potential harm to patients, and the increased risk of individual and plan liability. From the physician standpoint, a refusal to expand his or her scope of practice to accommodate an MCO can result in a reduced capitation payment, or in the loss of a contract.(23)

An important variable in capitated health care is patient referrals. The goal of a capitated health plan is to carefully match patient needs with the right level of service in a manner reflecting the treatment guidelines and philosophy of a particular plan.(24) It is overly simplistic to assume that clinicians should avoid referrals, but referrals do need to be justifiable both medically and economically.(25) Inappropriate referrals may not be covered by capitation or separate billing, and thus will be paid for out of an individual or group referral pool.(26) In addition, capitated plans often place limits on the type of tests that will be paid for, and require that certain laboratories be used.(27) Failure to adhere to testing guidelines may result in a financial penalty to plan physicians.(28)

In viewing the capitation octopus in the waters of physician credentialing, several preliminary observations can be made. Quality will continue to be a pivotal issue in physician evaluation in capitated settings, but the notion of quality will be closely linked to practice efficiency. In turn, efficiency will require that clinicians practice in ways that plans deem cost effective.(29) Capitated plans have the necessary practice infrastructure to guide practitioners by means of detailed clinical protocols, which are constructed to reflect a course of conduct that is medically and economically appropriate. Physicians will be judged based on their adherence to clinical guidelines, and the results of their patient care will be reflected in quantifiable outcome measures. Physician evaluation in capitated settings will rely on the use of statistical portraits of key clinical and financial performance data referred to as physician profiles.(30) Profiles can combine whatever performance data plans feel are most appropriate in assessing physician behavior, including not only cost and quality factors, but patient satisfaction measures as well.(31) Unlike traditional physician credentialing, credentialing in the world of capitation can occur at both a hospital and plan level; and while the overall goal of physician assessment in any setting is to assure quality, the plan emphasis will be strongly economic as well.


Credentialing, the appointment, reappointment, and delineation of clinical privileges, is a long-standing hospital process that has been the subject of extensive analyses and commentary.(32) From a physician point of view, credentialing is the process which grants membership to a medical staff, and as such, is fundamental to the practice of medicine. From the hospital's perspective, credentialing is a necessary quality control that is central to the institutional mission and to the welfare of patients. As a legal process, credentialing encompasses a rich body of common and statutory law.(33) Even prior to the landmark decision of Darling v. Charleston Community Memorial Hospital, hospitals had a long-standing corporate duty to appoint and reappoint competent staff.(34) Darling was the first case to find a corporate obligation for a hospital to monitor the quality of medical care provided within its tour walls.(35) Of Darling s progeny, Johnson v. Misericordia Community Hospital best articulates a hospital's credentialing duties.(36) In Johnson, the Wisconsin court concluded that hospitals have a direct and independent duty to patients to ensure that physicians are qualified for the privileges granted, and that clinical services the medical staff provides are evaluated.(37)

While not every state court has found the existence of a corporate credentialing responsibility, the laws and regulations of every state require that some type of staff evaluation process be in place.(38) Statutory credentialing requirements range from general directives to detailed sets of requirements, specifying not only procedures, but also specific issues to be addressed.(39) In addition to state law, the credentialing requirements of the Joint Commission on Accreditation of Health Organizations (JCAHO) have had a profound impact on the growth, development, and structure of the credentialing process.(40) The vast majority of American hospitals are accredited by JCAHO, and thus required to follow its credentialing guidelines. JCAHO mandates that hospital medical staffs have detailed bylaws which delineate processes for appointment, reappointment, and determination of clinical privileges.(41) While the standards of JCAHO do not have the force of law, courts have held hospitals to the criteria to which they voluntarily subscribe, and as JCAHO standards are incorporated into bylaws, they become contractually binding in some jurisdictions.(42)

Between 1965 and the late 1980s, the dynamics of credentialing did not change significantly. While the law surrounding the credentialing function has continually evolved, the process itself remained fairly constant until the 1990s. Generally, a hospital board delegates the credentialing function to its medical staff, as delineated in staff bylaws.(43) While the corporate responsibility for credentialing decisions rests with hospital trustees, it is only the rare situation when boards do more than acquiesce in the medical staff recommendations. As a medical staff function, credentialing is affected by staff development plans, which are attempts by a hospital's physicians to plan for their needs over a given period of time. While many aspects of credentialing entail routine background inquiries, the process, particularly as it concerns delineation of clinical privileges, focuses on quality of care considerations.(44) The emphasis of credentialing has been on the initial appointment stage, while reappointment was often treated as a routine matter. The hospital credentialing process has been the subject of frequent legal challenges, as aggrieved physicians have sought judicial redress in the face of adverse determinations. However, prior to suit, most hospital physician credentialing disputes pass through a series of administrative stages contained in corporate and staff bylaw provisions.(45) These legal challenges have created a body of law encompassing a wide range of legal theories on the state and federal level.

While the theoretical bases of physician credentialing challenges have expanded, these challenges can historically be divided into three primary areas. The first line of challenge in credentialing cases is contractual. Physician-plaintiffs typically mount arguments alleging that institutions in taking actions to deny, remove, or curtail staff privileges have breached hospital bylaw requirements.(46) The second approach used in credentialing challenges attacks the disciplinary action as a denial of due process, or as fundamentally unfair.(47) Due process challenges, while frequent, have proven difficult as state action requirements are not easily met. In New Jersey, where hospitals are viewed as quasi-public entities, state action barriers have been more easily overcome.(48) In California, courts have adopted the common law fairness doctrine, which allows easier access to court, in an attempt to protect individuals whose economic interests are threatened.(49)

Finally, medical staff credentialing challenges have been brought on statutory grounds. There is a body of case law in this area resting on a violation of federal civil rights laws. Physician-plaintiffs have argued that adverse hospital decisions constitute discrimination in employment on the basis of race, religion, or national origin.(50) While the majority of physician civil rights claims are brought under Title VII, actions are also waged under [sections] 1981, alleging contractual interference based on race, and under [sections] 1983 where violations of the Fourteenth Amendment are argued.(51) Under the 1967 Age Discrimination in Employment Act, physicians can argue that they were denied medical staff membership or privileges because of age.(52) Physicians with disabilities, including alcoholism and drug addiction, have used both the Americans with Disabilities Act (ADA) and the Rehabilitation Act to challenge hospital actions, advocating that hospitals provide them with reasonable employment accommodations prior to adverse staff determinations.(53) Additionally, there have been a few medical staff actions filed under the federal criminal Racketeer Influenced and Corrupt Organizations Act (RICO) in which plaintiffs argued that hospital conduct constitutes a form of racketeering.(54)

Antitrust laws were first applied to hospital medical staff disputes in the 1970s.(55) In these antitrust disputes, physician-plaintiffs have argued that their exclusion from medical staffs constitutes a restraint of trade in violation of [sections] 1 of the Sherman Act or its state law counterpart. …

Log in to your account to read this article – and millions more.