Capitation

By Lynn Leng | Last Updated: April 12, 2021

Image by: Brett Dashevsky

What is Capitation?  

In the capitation reimbursement model, insurance companies pay the healthcare provider a predetermined sum of money. In return, the healthcare provider agrees to assume part or all of the costs of caring for defined patient pools. This model is a more quality-based alternative to the classic fee-for-service model and aims to encourage value-based care.  

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Key Takeaways

  • Capitation is a new alternative healthcare delivery model which claims to reduce healthcare utilization, improve patient outcomes and reduce costs.

  • Healthcare providers are paid a per-member-per-month fee in exchange for care.

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Choices, Choices, Choices 

There are 3 types of capitation:

  1. Primary: Insurance companies pay primary care physicians, known as "PCPs," for every patient member. 

  2. Secondary: Insurance companies manage the relationship between PCPs and secondary providers (radiology, physical therapy, etc.). The secondary providers receive capitation payments based on the PCP’s number of patients.

  3. Global Providers are paid a per-member-per-month, known as "PMPM," fee-based on the patient pool’s size and health complexity in exchange for health services.

When people talk about capitation, they’re most likely referring to the third (global) option. Insurers use patients’ premiums to provide the PMPM fee to the provider (physician, hospital, or medical group) who coordinates care. Insurers determine the PMPM amount based on a number of factors, such as age, range of services provided, US region, number of patients and the time period in which the services are provided. 

The insurer’s monthly payment to providers essentially transfers the financial risk to the provider. The provider can then use these payments to better control patient care and is not limited by pay-as-you-go insurance policies. To many in the healthcare industry, this model is lauded as both a fiscally sound and patient-centered approach to care, as providers are incentivized to follow preventative health measures. If the preventative health measures are working, then patients won’t need costly services and the provider can keep more of the  PMPM fee.

Out with the Old, In with the New

Healthcare experts often hail capitation as a better alternative to the FFS model, where payment is dependent on the number of services or materials used. This FFS model, which is pre-WWII “health insurance” offered the highest compensation to physicians who provided the most services. As expected, this model leads to high numbers of unnecessary prescriptions and services for patients in an effort for providers to make more money. We’ve now reached the point where for every $100 spent in the economy, almost 20% goes towards healthcare. Yet, our health outcomes rank at the bottom in almost every measure of care quality compared to other industrialized nations.

Fixing the Healthcare Economy

The Obama administration introduced the pay-for-performance model in 2010, which was based on clinical target achievements such as lowering a patient’s cholesterol. This catapulted the population-based payment system, such as the capitation model into increased popularity. This model addresses the flaws of the FFS model, such as non-standardized quality metrics and overuse of unnecessary services, which have led to exponential healthcare spending.

Pros & Cons

We had really high hopes for capitation models, including an increased focus on value-based care, less medical and clinical waste and increased patient satisfaction. For example, look at how this model helps rural communities. The stable flow of revenue into rural hospitals and providers trumps the old unstable FFS model, where this type of pay-as-you-provide system does not support health providers with lower patient volume.

However, providers also criticize these capitated models because they may encourage more emphasis on the number of patients rather than the quality of healthcare. Recall that the provider assumes full financial risk when the cost of patient care exceeds the capitated amount (PMPM fee), even if the care is high-quality. Therefore, providers may focus on taking on as many patients as possible or only taking healthy, less complex patients. Thus, providers must ensure there are proper checks and balances that protect both themselves and patients.

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Outside the Huddle

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Reviewed by Geetika Rao, MPH | Edited by Nidhi Mahagaokar, MPH and Jared Dashevsky, M.Eng. | Fact checked by Julia Radossich, PA-C