The capitation payment model has been used in the healthcare industry for many years, and it has evolved over time as healthcare systems have changed. The earliest forms of capitation were used in the 19th century by industrial employers who paid physicians a set salary to care for their employees.
In the mid-20th century, capitation was used by prepaid health plans, which provided healthcare services to members for a fixed fee. These plans became popular in the United States in the 1970s and 1980s, with the rise of health maintenance organizations (HMOs). HMOs used capitation to pay primary care physicians, who were then responsible for providing and coordinating all of the healthcare services for their patients.
In the 1990s, this concept was further developed as part of the managed care movement. Managed care organizations, such as health maintenance organizations and preferred provider organizations (PPOs), used capitation to incentivize healthcare providers to manage costs and utilization. This was done by providing financial incentives to providers who delivered high-quality care while keeping costs low.
What is Capitation?
Capitation is a payment model used in healthcare where a fixed amount of money is paid in advance to the provider per patient (or "head") for each unit of time, regardless of the amount of healthcare services that person uses. In a capitation model, healthcare providers receive a set amount of payment per patient enrolled in the program, regardless of how much healthcare the patient receives during that time.
Total capitation payment received by a provider is based on the number of patients enrolled in the plan, which is known as the capitated rate or capitation premium, which is sometimes referred to as the “cap”. The capitated payment is the same for each patient during that period, regardless whether they seek medical services and treatment or not.
This is in contrast to a fee-for-service model, where healthcare providers are paid for each individual service provided, and the amount of payment is based on the complexity and cost of each service. In a capitation model, the goal is to incentivize healthcare providers to provide more preventive care and to avoid unnecessary treatments or tests, as they are responsible for managing the cost of care for each patient.
In the capitation model, providers are paid for each enrolled patient, or per member per month (PMPM).
The components of capitation are:
- The advance payment of a flat fee
- For the delivery of a specific set of services in a given period
- For an agreed-upon number of enrolled members
- Whether or not patients seek care during that period
By providing a fixed amount of payment upfront, healthcare providers have an incentive to manage their costs, while also providing appropriate care for their patients. This can lead to better patient outcomes and cost savings for both the healthcare provider and the payer. These models are commonly used by health maintenance organizations (HMOs), accountable care organizations (ACOs), and some other types of managed care organizations.
Capitation payment is the amount paid per person in advance and is based on various factors, including average expected healthcare utilization of the members as well as the local costs of medical services.
Some payers also establish something called a “risk pool”. This is a percentage of the overall payment withheld until the end of the year. If healthcare providers performed well in the previous year (that is, they do not use up more than the total capitation amount), payers may release the extra amount to physicians at the end of the year. However, if the services provided ends up costing much more than the total of the agreed-upon amount, the payer may withhold the money in the “risk pool” to make up for the loss.)
For example, a health maintenance organization (HMO) may enter into an agreement with a primary care physician (PCP) or medical group for a year, with a negotiated rate of $50 per patient per month. The HMO may ask to withhold 10% of this amount, or $5 per patient per month, and place it in the “risk pool”. In this scenario, the actual payment that the PCP/medical group receives per member per month is $45.
If the HMO in this example has 500 patients, the PCP/medical group will be paid a guaranteed amount of $22,500 per month (or $270,000 per year) with $30,000 in the “risk pool”.
Capitation agreements or contracts are entered into by the healthcare provider and the payer to establish rates and other details. These agreements may also include a list of services that will be provided by the health plan to the patient, such as preventive services, medications and immunizations, lab tests, routine screenings, and other diagnostic and treatment services.
Types of Capitation Agreements
Generally speaking, there are three types of capitation agreements, depending on the relationship of the paying entity and the receiver of the payment:
- Primary – this type of agreement happens when a managed care organization such as an HMO pays a physician (or physician group) directly for care to be provided to the HMO’s members.
- Secondary – this type is created when an HMO arranges a contract involving primary care physicians and a “secondary” healthcare service provider such as a diagnostic or imaging service provider or a specialist, among others.
- Global – this type can be taken to mean a couple of different arrangements.
It can mean “a fixed payment made to health care professionals or organizations for the care their patients may require during a contract period regardless of how many services are provided to patients and that can be adjusted to account for severity of illness.” This is how it is defined by the American Academy of Family Physicians (AAFP). This definition is similar to the basic definition of capitation.
On the other hand, an article in PBS defines global capitation as an arrangement “in which whole networks of hospitals and physicians band together to receive single fixed monthly payments for enrolled health plan members; under global capitation, the providers sign a single contract with a health plan to cover the care of groups of members, and then must determine a method of dividing up the capitated check among themselves.”
Services Covered by Capitation
According to the American College of Physicians, the following are covered by most capitation plans:
- Preventive, diagnostic, and treatment services
- Injections, immunizations, and medications administered in the office
- Outpatient laboratory tests done either in the office or at a designated laboratory
- Health education and counseling services performed in the office
- Routine vision and hearing screening
Advantages of Capitation
Capitation offers several advantages to payers, physicians and patients.
Financial Predictability: Capitation model offers financial predictability for both healthcare providers and payers. Providers can more easily forecast their revenue and expenses, while payers can more accurately budget their healthcare spending.
Incentivizes Preventive Care: This model can incentivize healthcare providers to focus on preventive care rather than just treating illnesses or conditions after they occur. By doing so, providers can help keep patients healthy and avoid costly treatments down the line.
Reduces Administrative Costs: Capitation can help reduce administrative costs for both providers and payers. In a capitated model, providers can streamline administrative processes and reduce overhead, while payers can reduce the need for claims processing and adjudication.
Encourages Efficient Resource Use: Capitation incentivizes providers to use resources more efficiently, as they are responsible for managing the costs of care for their patients. This can lead to more appropriate utilization of healthcare services, reducing the risk of unnecessary or redundant testing and treatments.
Supports Value-Based Care: Capitation also supports value-based care, which focuses on improving patient outcomes rather than just providing healthcare services. By incentivizing providers to focus on quality and outcomes rather than volume, capitation can help improve the overall quality of care while reducing costs.
Disadvantages of Capitation
While capitation is designed to decrease costs and improve outcomes, it does come with its own disadvantages.
Potential Under-use of Services: In a capitation model, providers may be incentivized to underuse services in order to save costs, which could result in patients not receiving necessary care. This could be particularly concerning for patients with chronic or complex conditions who require ongoing medical care.
Potential Overuse of Services: On the other hand, capitation could also incentivize overuse of services, as providers may prioritize quantity over quality. They may be incentivized to see more patients in order to increase their revenue. This could lead to a situation where providers are rushing through appointments or not providing high-quality care, in order to see more patients and maximize their revenue.
Risk Selection: Capitation could also create an incentive for providers to avoid treating patients who are sicker or more expensive to treat. This is known as risk selection, and it can result in a disproportionate number of high-cost patients being concentrated in fee-for-service models, which could make them less sustainable.
Complexity of Risk Adjustment: In order to properly manage risk, capitation models require accurate patient risk adjustment. This can be difficult to accomplish, as risk adjustment methodologies can be complex and may not always accurately reflect a patient's health status.
Financial Risk: Capitation also involves financial risk for healthcare providers, who must manage the costs of care for their patients while receiving a fixed amount of payment. If the costs of care exceed the capitation payment, the provider may experience financial losses, which could be a significant concern for smaller or independent providers.
Some of the above drawbacks may potentially lead into a vicious cycle that eventually results in providers losing money when participating in a capitation payment model. This could push them to go back to the FFS model with its attendant challenges and shortcomings.
The triple aim of healthcare framework designed by IHI and embraced by CMS aspires for better care for individuals, better health for populations, and lower cost of healthcare.
The capitation model of payment intends to support these goals. While capitation may never be the only payment structure in healthcare, it holds the promise of supporting the above aims by encouraging greater control of healthcare costs and reducing waste in terms of unnecessary medical treatments and services. Proponents claim it effectively increases cost savings, and has the potential to improve patients’ experience as well as their overall health outcomes.
RevenueXL Inc. provides best value comprehensive solutions to medical practices, including solutions for Practice Management or Medical Billing software – such as PrognoCIS EHR Software which can be enabled to automatically differentiate between capitation claims and fee-for-service claims. PrognoCIS also has reports that can help users see anticipated capitation payment from private insurance compared with expected Medicare payment, which helps them assess their expected cash flow in a more timely and accurate manner.
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CMS Capitated Model: https://www.cms.gov/Medicare-Medicaid-Coordination/Medicare-and-Medicaid-Coordination/Medicare-Medicaid-Coordination-Office/FinancialAlignmentInitiative/CapitatedModel.html
CMS Value-Based Primary Care: https://www.cms.gov/newsroom/press-releases/hhs-news-hhs-deliver-value-based-transformation-primary-care
Primary Care First Model Options: https://innovation.cms.gov/initiatives/primary-care-first-model-options/
Health Affairs Article on Why The U.S. Spends So Much on Healthcare: https://www.healthaffairs.org/doi/10.1377/hlthaff.2018.05144