Table of ContentsView AllTable of ContentsHow It WorksExamplesBenefitsDrawbacks
Table of ContentsView All
View All
Table of Contents
How It Works
Examples
Benefits
Drawbacks
With capitation, the physician—otherwise known as theprimary care physician (PCP)— is paid a set amount for each enrolled patient whether a patient seeks care or not. The PCP is usually contracted with ahealth maintenance organization (HMO)whose role it is to recruit patients.
This article explains how capitation works, including the different capitation models used in healthcare. It also lists the pros and cons of capitation and how it affects you as an individual.
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DefinitionThe term “capitation” comes from the Latin wordcaput,meaning head, and is used to describe the headcount within an HMO or similar group.
Definition
The term “capitation” comes from the Latin wordcaput,meaning head, and is used to describe the headcount within an HMO or similar group.
How Does Capitation Work?
Capitation payments are calculated based on the local costs and average utilization of services in that area. Because of this, the remuneration (payment for services) can vary from one state or city to the next.
In some cases, a separate capitation fee may be provided for “extra” services (like screenings or tests) that the physician can draw upon when needed. Other plans allow physicians to charge a fee for the “extra” service at a discounted rate.
Conceptually, larger risk pools have lower utilization costs because the risk is spread between many members. However, this is not always the case as some groups, such as those with an older population, utilize healthcare much more.
If the capitation is based on a high-risk pool, the HMO or IPA may offer incentives to physicians or hospitals to keep their members healthy.
Examples of Healthcare Capitation
An example of capitation is an HMO that negotiates a fee of $500 per year per member with an approved PCP. For an HMO group comprised of 1,000 members, the PCP would be paid $500,000 per year and, in return, be expected to supply all authorized medical services to those members for that year.
If an individual patient utilizes $2,000 worth of healthcare services, the practice would end up losing $1,500 on that patient. On the other hand, if someone uses only $10 worth of healthcare services, the practice would stand to make a profit of $490.
Projected profitability is ultimately based on how much healthcare the group is likely to need. Given that older people with pre-existing conditions will be often mixed with younger and healthier people, the project profits can differ considerably from the actual profit.
There are primary and secondary capitation payments:
Another form of capitation will reward PCPs for preventing illness. In this model, the PCP may offer more preventive health screenings and services to avoid more expensive medical procedures. This model is more common in PCPs who manage high-risk pools.
ProsSimplifies bookkeepingDiscourages excessive billing or more costly proceduresPatients avoid unnecessary tests and proceduresConsProviders may spend less time with each patientFewer services may be offeredPatients may avoid necessary procedures not included the member benefits
ProsSimplifies bookkeepingDiscourages excessive billing or more costly proceduresPatients avoid unnecessary tests and procedures
Simplifies bookkeeping
Discourages excessive billing or more costly procedures
Patients avoid unnecessary tests and procedures
ConsProviders may spend less time with each patientFewer services may be offeredPatients may avoid necessary procedures not included the member benefits
Providers may spend less time with each patient
Fewer services may be offered
Patients may avoid necessary procedures not included the member benefits
Benefits of a Capitation System
The chief benefit to PCPs is the decreased costs of bookkeeping. A contracted PCP does not need to maintain a larger billing staff. It also doesn’t have to wait to be reimbursed for its services. Alleviating these costs can allow a practice to treat more patients at a lower overall operating expense.
The main benefit to patients is the avoidance of unnecessary and often time-consuming procedures that may trigger highout-of-pocket expenses.
Some argue that capitation is a more cost-efficient and responsible healthcare model, and there is some evidence to support the claim.
Drawbacks of a Capitation System
One of the main concerns about healthcare capitation is that it incentivizes PCPs to enroll as many patients as possible, leaving less and less time to see them.
To increase profitability, a practice may institute policies that exclude procedures to which the patient may be entitled. This is called"healthcare rationing,“a practice in which access to essential health services is restricted due to budgetary constraints or policies. In this instance, the only person who truly suffers is the patient.
Some researchers warn that while capitation can improve margins for insurers, this doesn’t translate to improvement in the range or quality of benefits offered to members. While this doesn’t necessarily mean that the services are inadequate, it also doesn’t suggest that the capitation model is “better” than the traditionalfee-for-serviceinsurance model.
Summary
Capitation is a method of payment in which a physician or hospital is paid an annual fixed fee upfront to provide primary healthcare services to a group of patients for that year. The capitation payment is based on local costs and the projected healthcare expenditure for that group or area.
Benefits of capitation include simplified billing for the physician and the avoidance of unnecessary tests or procedures for the patient. Drawbacks include shorter visits and fewer member benefits as physicians are encouraged to enroll as many members as possible while keeping costs down.
4 SourcesVerywell Health uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read oureditorial processto learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.Matchar DB, Lai WX, Kumar A, Ansah JP, Ng YF.A causal view of the role and potential limitations of capitation in promoting whole health system performance.Int J Environ Res Public Health.2023 Mar;20(5):4581. doi:10.3390/ijerph20054581American College of Physicians.Understanding capitation.Tummalapalli SL, Estrella MM, Janat-Khah DP, Keyhani S, Ibrahim S.Capitated versus fee-for-service reimbursement and quality of care for chronic disease: a US cross-sectional analysis.BMC Health Serv Res.2022;22:19. doi:10.1186/s12913-021-07313-3Kaiser Family Foundation.Medicare Advantage in 2023: enrollment update and key trends.
4 Sources
Verywell Health uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read oureditorial processto learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.Matchar DB, Lai WX, Kumar A, Ansah JP, Ng YF.A causal view of the role and potential limitations of capitation in promoting whole health system performance.Int J Environ Res Public Health.2023 Mar;20(5):4581. doi:10.3390/ijerph20054581American College of Physicians.Understanding capitation.Tummalapalli SL, Estrella MM, Janat-Khah DP, Keyhani S, Ibrahim S.Capitated versus fee-for-service reimbursement and quality of care for chronic disease: a US cross-sectional analysis.BMC Health Serv Res.2022;22:19. doi:10.1186/s12913-021-07313-3Kaiser Family Foundation.Medicare Advantage in 2023: enrollment update and key trends.
Verywell Health uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read oureditorial processto learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
Matchar DB, Lai WX, Kumar A, Ansah JP, Ng YF.A causal view of the role and potential limitations of capitation in promoting whole health system performance.Int J Environ Res Public Health.2023 Mar;20(5):4581. doi:10.3390/ijerph20054581American College of Physicians.Understanding capitation.Tummalapalli SL, Estrella MM, Janat-Khah DP, Keyhani S, Ibrahim S.Capitated versus fee-for-service reimbursement and quality of care for chronic disease: a US cross-sectional analysis.BMC Health Serv Res.2022;22:19. doi:10.1186/s12913-021-07313-3Kaiser Family Foundation.Medicare Advantage in 2023: enrollment update and key trends.
Matchar DB, Lai WX, Kumar A, Ansah JP, Ng YF.A causal view of the role and potential limitations of capitation in promoting whole health system performance.Int J Environ Res Public Health.2023 Mar;20(5):4581. doi:10.3390/ijerph20054581
American College of Physicians.Understanding capitation.
Tummalapalli SL, Estrella MM, Janat-Khah DP, Keyhani S, Ibrahim S.Capitated versus fee-for-service reimbursement and quality of care for chronic disease: a US cross-sectional analysis.BMC Health Serv Res.2022;22:19. doi:10.1186/s12913-021-07313-3
Kaiser Family Foundation.Medicare Advantage in 2023: enrollment update and key trends.
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