What is Capitation?

Capitation is a contractual model by which healthcare providers or organizations are compensated an agreed amount per enrolled patient, per interval (usually monthly), for delivering specified health services. The payment is not varied based on the level of care each patient needs over the interval. Consequently, the provider bears some or all financial risk for patient care but benefits by having the flexibility to control resources.

How Does Capitation Work?

Under the capitation model, payers enter into contracts with providers like primary care physicians, medical groups, or healthcare organizations to receive a fixed monthly or annual amount for every enrolled patient, sometimes adjusted based on considerations like the patient's age, health, and expected risk. These capitation payments tend to be made in advance and are intended to pay for a specified range of health care services within the length of the contract.

The provider is usually obligated to provide all preventive, routine, and sometimes specialty care as determined by the particular terms of the contract. The key aspect of capitation is that if the entire cost incurred in treating patients over the contract duration is more than the capitation payment, the cost is borne by the provider.

However, if the cost of patient care is less than the revenue from capitation payments, the provider keeps the excess, motivating the use of efficient methodologies and an aggressive approach to preventive treatments. This model incentivizes providers to use resources efficiently and maintain their patient base healthy, with an interest in keeping costs under the budgeted amount.

Capitation vs. Fee-for-Service Model

Capitation vs. Bundled Payments

Both models have the goal of aligning payer and provider incentives with value and efficiency, but important distinctions are:

• Capitation: Makes a single fixed payment per patient for a series of services over an extended time frame, encompassing a wide range of patient care.
• Bundled Payments: One payment to providers for all the services around a particular treatment or "episode of care" (e.g., a joint replacement), across several providers and settings of care.

Capitation is appropriate for continuous, total care, while bundled payments are directed at episodic, condition-focused management.

Capitation Models

• Primary Capitation: Payment to primary care providers for routine, preventive, and general care.
• Secondary (Specialist) Capitation: Payments to specialists for specified specialty services.
• Global Capitation: The providers take on responsibility (and receive payment) for virtually all the patient care needs in a population, including primary, specialty, and inpatient care.

Examples of Capitation in Practice

• HMOs: Primary care physicians receive a monthly payment per member for whom they are responsible, for office visits, preventive care, and routine treatments.
• ACOs: A group of providers is paid a fixed sum per patient and reallocates payments between physicians and facilities, encouraging coordination and population health management.
• Dental Plans: Dentists are paid a capitation rate for each enrolled individual's preventive and primary dental care.​

Incentives and Risks Under Capitation

• Incentives: Encourage preventive care, care coordination, effective utilization, and improved resource use.
• Risks: Providers are encouraged to constrain unnecessary services, but at risk of under-treating if they concentrate too much on cost containment ("stinting").
• Risk Adjustment: Numerous capitation agreements take patient health status into account to prevent providers from being penalized for serving sicker populations.

Impact on Care Delivery and RCM

• Providers need to make an investment in population health, care coordination, and preventive health activities to effectively manage risk.
• Accurate patient data, proactive outreach, and robust EHR/reporting tools are essential to track outcomes and control costs.
• Revenue cycle teams manage capitation differently than fee-for-service, emphasizing enrollment accuracy, reporting, and periodic reconciliation over individual claims processing.

Advantages and Disadvantages of Capitation

In Summary

Capitation is a cornerstone of alternative healthcare payment models, offering the promise of cost control, better care coordination, and population health management, while requiring sophisticated data, administration, and a strong commitment to patient-centered quality.