What Is Capitation and How Does It Work?

Capitation is a healthcare payment model where providers receive a fixed payment per patient, rather than for each individual service rendered. This system aims to manage healthcare costs and contrasts with traditional fee-for-service models, which reimburse based on service volume and type.

Defining Capitation

Capitation is a fixed amount paid to a healthcare provider for each patient under their care, covering a specified period, regardless of services used. This payment is often expressed as “per member per month” (PMPM), signifying a set monthly payment for each individual patient attributed to a provider or group.

The payment is determined in advance and remains fixed for the contract duration, which is typically yearly. For instance, a health maintenance organization (HMO) might pay a primary care provider $500 per year for each enrolled member, meaning that provider receives this amount whether the patient seeks extensive care or no care at all.

This model transfers some financial risk from the payer, such as an insurance company, to the healthcare provider. Unlike a fee-for-service system where providers are compensated for each procedure, capitation incentivizes providers to manage costs efficiently because their revenue is predetermined.

While a fee-for-service model rewards volume, capitation encourages a focus on managing the health of a patient population within a set budget.

How Capitation Works

Capitation payments begin when a payer, such as an insurance company or government program, contracts with a healthcare provider or group. Under this agreement, the provider receives a regular, predetermined payment for each enrolled patient, commonly on a monthly basis.

This fixed payment covers a predetermined set of medical services outlined in the contract, which typically includes preventive, diagnostic, and treatment services. For example, a physician group might receive $X per patient per month to cover all primary care services for a panel of 1,000 patients.

This means the group receives $1,000X each month, irrespective of how many patients visit or the complexity of their needs. Payments are calculated based on factors like local costs and the average expected utilization of services, which means rates can vary across different regions.

This upfront payment allows providers to budget for the care of their attributed patient population.

Key Elements of Capitation Agreements

Capitation agreements define the payment structure and provider responsibilities through several key components. A central element is the patient panel, the specific group of patients for whom the provider receives payments and assumes care responsibility.

The scope of covered services is explicitly detailed, outlining which treatments, procedures, and types of care are included within the fixed capitated payment. These often encompass routine office visits, basic laboratory tests, immunizations, and health education services.

Risk adjustment modifies payments based on patient characteristics such as age, gender, and health status, including chronic conditions. This adjustment ensures providers caring for sicker patients receive higher payments to cover expected costs.

To mitigate financial risk for providers, agreements may include stop-loss provisions. These provide additional payments if an individual patient’s medical costs exceed a predetermined threshold, acting as a form of insurance against exceptionally high-cost cases.

Additionally, carve-outs may be specified, separating certain high-cost services or specialized care, like mental health or specific transplant procedures, from the capitated payment. These services are then reimbursed under a different arrangement.

Role of Capitation in Healthcare Delivery

Capitation influences healthcare delivery by shifting provider incentives. Since providers receive a fixed payment per patient regardless of services used, they are encouraged to keep patients healthy and prevent costly illnesses.

This emphasizes preventive care, such as regular screenings, vaccinations, and health education, to avoid more expensive interventions later. The model also promotes efficient resource utilization, as providers manage their budget for patient care.

This payment structure encourages population health management, where providers proactively identify and address the health needs of their entire enrolled group. It supports integrated care approaches, incentivizing providers to coordinate care across different settings and specialties.

By aligning financial incentives with patient wellness, capitation fosters a more proactive and coordinated system of care delivery.