Overall, the doctor is assuming that (on average) the patients from this IPA will use less than $400 each in services. As a personal finance writer, her expertise includes money management and insurance-related topics. We help small practices accelerate their growth whether using the features bundled in our award winning software or our tailored services. By Trisha Torrey Trisha Torrey is a patient empowerment and advocacy consultant. She has written several books about patient advocacy and how to best navigate the healthcare system. Caput (which means head) is the Latin word that capitation is derived from.

If a patient isn’t seen, the doctor doesn’t bill for services for that patient. In contrast, capitation payments are provided for every enrolled member, even if that patient never comes in for an exam or treatment. Proponents claim it effectively increases cost savings, and has the potential to improve patients’ experience as well as their overall health outcomes. Capitation is a model that pays a fixed amount to providers based on the number of patients they have or see. Meanwhile, fee-for-service (FFS) pays based on the procedures or services that providers perform.

Money in this risk pool is withheld from the physician until the end of the fiscal year. If the health plan does well financially, the medical provider receives this money; if the health plan does poorly, the money is kept to pay the deficit expenses. Rural communities and providers can especially benefit from capitation programs due to the unique care landscape. Healthcare providers or organizations can also be paid a set amount for whichever services their patients may require during the contract term, regardless of how many services are rendered. It’s similar to the fundamental definition of capitation, according to the American Academy of Family Physicians (AAFP). 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.

These services also protect public health care providers, which often specialize in carved-out care. So providers can receive more money for some members, particularly those at higher risk of needing more involved medical care. This number is based on local medical costs, so it may vary from region to region. Benefits of capitation include simplified billing for the physician and the avoidance of unnecessary tests or procedures for the patient. Drawbacks include shorter visits and fewer member benefits as physicians are encouraged to enroll as many members as possible while keeping costs down.

What Do Capitation Payments Cover?

Patient care may cost more than the money allocated, even if the carve-out services are managed separately. While capitation is designed to decrease costs and improve outcomes, it does come with its own disadvantages. The main benefit to patients is the avoidance of unnecessary and often time-consuming procedures that may trigger high out-of-pocket expenses. Projected profitability is ultimately based on how much healthcare the group is likely to need. Given that older people with pre-existing conditions will be often mixed with younger and healthier people, the project profits can differ considerably from the actual profit. The idea is that not all patients will use $400 in services over the course of the year.

This shared-savings/shared-risk model incentivizes providers to lower costs by offering them the risk pool funds as a reward for reaching quality measures. In exchange for a capitation fee, the medical provider agrees to provide all necessary health care for each member. Even if a member doesn’t need the provider’s services during the time period, the payment is still sent. And even if the member seeks medical care several times, the amount of the payment remains the same. A capitation payment is a fixed amount of money paid in advance to a medical provider by a state or health plan for an agreed amount of time.

They also explained the importance of establishing networks of high-quality, cost-efficient providers when following a capitated payment model. The alternative model cannot support a large network of providers due to its capitated payments, so organizations must choose providers that will provide high-quality, affordable care. As the healthcare industry continues to move towards value-based care, more managed care organizations are using capitation reimbursement models to ensure quality of care and manage cost.

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The IPA needs to secure insurance coverage for its patients for the upcoming year. Capitation payments have various advantages when it comes to the alternative—FFS. However, some providers may still opt for FFS given its advantages over capitation. Capitation agreements will provide a list of specific included services in the contract. RevenueXL is a provider of healthcare solutions with 15+ years of expertise in process knowledge, cutting edge technology and a team of experts in various facets of practice management.

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Some argue that capitation is a more cost-efficient and responsible healthcare model, and there is some evidence to support the claim. One major drawback of capitation is that it incentivizes physicians to spend less time with patients—i.e. The first is where the provider is paid directly by the insurer, also called a primary capitation. Then, a secondary capitation is where another provider (such as a lab or medical specialist) is paid out of the provider’s funds. Sara F. Adornato, CEO of Barnes-Kasson hospital, another provider taking part in the model, noted the extent to which this reimbursement model will benefit the hospital and the community.

1. Capitation is a payment model in the healthcare industry where a provider or facility receives a fixed amount per patient, regardless of the types and quantity of services rendered.
2. On the downside, a capitation arrangement can lead providers to opt for less expensive drugs or procedures.
3. Providers receive fixed payments per patient, regardless of the actual costs incurred in providing care.

The provider receives payment for each member every month they’re enrolled. This figure is based on local medical prices, which may differ by location. With FFS medical billing, each procedure must be appropriately coded and often justified, so the health insurance company pays the bill. To increase profitability, a practice may institute policies that exclude procedures to which the patient may be entitled. This is called “healthcare rationing,” a practice in which access to essential health services is restricted due to budgetary constraints or policies. One of the main concerns about healthcare capitation is that it incentivizes PCPs to enroll as many patients as possible, leaving less and less time to see them.

Services

On the downside, a capitation arrangement can lead providers to opt for less expensive drugs or procedures. Capitation can also encourage providers to enroll large numbers of patients, which can lead to short visits for patients and long wait times. At the same time, it’s been shown that capitation systems encourage doctors to reduce services. A Center for Studying what is capitation in medical billing Health System Change study found that 7% of doctors in a capitation system reduce services because there’s financial incentive to do so.

They are fixed, pre-arranged monthly payments received by a physician, clinic, or hospital per patient enrolled in a health plan, or per capita. The monthly payment is calculated one year in advance and remains fixed for that year, regardless of how often the patient needs services. The healthcare provider receives the agreed-upon fee per enrolled member per month (PMPM), which covers the services specified in the contract. Capitation is a widely used payment model in managed care organizations such as Health Maintenance Organizations (HMOs).

To avoid this, organizations will need to demonstrate clearly to patients the value and coordination benefits that come with narrow networks filled with high-quality, cost-efficient providers. Let’s say a medical practice receives $300 per month for each enrolled member younger than 12 months old. If this practice had 50 patients in that category, it’d receive $15,000 a month to provide the necessary care for them. Some researchers warn that while capitation can improve margins for insurers, this doesn’t translate to improvement in the range or quality of benefits offered to members. While this doesn’t necessarily mean that the services are inadequate, it also doesn’t suggest that the capitation model is “better” than the traditional fee-for-service insurance model.

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. While capitation can help prevent premiums from skyrocketing by discouraging excessive spending, it may do so to the detriment of the individual patient. It is not unusual, for example, to hear how HMO appointments can last no more than a few minutes or how physicians offer diagnoses without ever touching a patient.

In such cases, an agreed amount of money may be withheld until the end of the fiscal year and only released if the total amount spent by the HMO or IPA falls beneath a certain threshold. If it does not, some or all of the money may be kept to pay the excess amount. Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.