What is Capitation?

Posted by: Alok Prasad

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The United States of America currently ranks highest among developed nations in per-capita healthcare spending.  This concerning information came out of a 2019 paper in Health Affairs by a team from the Johns Hopkins Bloomberg School of Public Health Research.

According to the study’s lead author, Gerard F. Anderson, PhD, the U.S. “remains the most expensive because of the prices the U.S pays for health services.”

It’s not surprising that in the setting of skyrocketing prices, both U.S. government and private payers are implementing and adopting alternatives to the fee-for-service (FFS) care model.  FFS has faced increasing criticism as a costly and wasteful payment model for healthcare that encourages providers to deliver more services so that they can be paid more. 

In the FFS model, providers are paid on a per-piece basis – and each individual procedure, visit, test (such as laboratory and imaging) as well as other treatments and services, are all billed to a payer.  The concern is that in this model there is a tendency for providers to deliver more services in order to maximize their income – and some of these services might be unnecessary or inappropriate, thus resulting in inflated costs without improving the quality of care or the patient’s health outcome.

One payment model that is considered a favorable alternative to FFS is Capitation or Capitated Insurance. What is capitation as applied to medical or healthcare field?

What is Capitation?

Capitation is best described as a healthcare payment model in which physicians and other healthcare providers such as clinics and hospitals are paid an agreed-upon fixed amount per patient over a defined time frame for health care services.  The capitated payment is the same for each patient during that period, regardless whether they seek medical services and treatment or not.

In the capitation model, providers are paid for each enrolled patient, or per member per month (PMPM).  This is called the capitated rate or capitation premium, which is sometimes referred to as the “cap”.

The components of capitation are:

  1. The advance payment of a flat fee
  2. For the delivery of a specific set of services in a given period
  3. For an agreed-upon number of enrolled members
  4. Whether or not patients seek care during that period

Top Rated Practice Management Software Handle Capitation With Ease

Capitated Payments

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 Agreement

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:

  1. 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.
  1. 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.
  1. 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:

  1. Preventive, diagnostic, and treatment services
  2. Injections, immunizations, and medications administered in the office
  3. Outpatient laboratory tests done either in the office or at a designated laboratory
  4. Health education and counseling services performed in the office
  5. Routine vision and hearing screening

Advantages of Capitation

Capitation offers several advantages to payers, physicians and patients.

  1. In the capitation system, healthcare providers are usually paid in advance; they do not have to wait for the billing cycle to be completed before they paid. This means that from the outset they have an idea of the cash flow coming in and can plan accordingly.
  1. Healthcare providers won’t need to spend as much money and time on billing and accounting staff.
  1. Payers benefit because the costs of medical services can be kept under control.
  1. Patients may see an improvement in their overall health in situations where providers offer preventative care and wellness programs as part of their services. Prevention and wellness initiatives are seen as a means for providers to control costs because they can potentially decrease the volume of services needed by patients.
  1. Patients can avoid the inconvenience and cost of medically unnecessary procedures since providers are encouraged to be conscientious about providing appropriate services and treatment rather than increasing the number of these services and treatments as a means to increase fees.

Disadvantages of Capitation

While capitation is designed to decrease costs and improve outcomes, it does come with its own disadvantages.

  1. Whereas FFS laid the burden of financial risk on the payer, capitation presents an increased financial risk for healthcare providers. This is because the payment to the provider is a fixed amount, regardless of the time, effort, and other resources required to provide care to the patient.  This risk is increased for providers who enroll a larger percentage of patients with complex medical issues.  This may potentially lead providers to avoid enrolling patients whom they think will need more services, such as those with complicated issues or multiple comorbidities.
  1. Another situation than can arise is one in which providers may not order or provide necessary treatment or services in an effort to optimize their income, resulting in “underutilization” of needed health services, which is a form of healthcare rationing.
  1. In certain locations where capitation payments are low, providers may not have the funding to offer preventive care or wellness programs which help improve patient outcomes.
  1. The capitation model might also encourage providers to enroll a large amount of patients to maximize their expected payment. This situation can backfire for both patients and providers if it results in longer wait times and decreased amount of time for patient care.  This could result in increased risk of patient safety issues as well decreased patient satisfaction, and can also potentially contribute to provider burnout when providers are trying to see more patients than they can reasonably provide care for.

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.

Read More:

Value-Based Care – Definition, Benefits, Strategies, and Challenges in Transitioning from Fee for Service

5 Key Alternative Payment Models (APM) Concepts Physicians Need to Know Today

MACRA Made Easy – Essential Reference for Small Practices

What is MIPS? 5 Key Concepts Physicians Need to Know

Additional Resources:

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


Topics: Capitation

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