Capitation in medical billing is a payment arrangement in which healthcare organizations or providers receive an upfront, recurring payment per patient to cover the expected cost of care services. The payment is regardless of how many times the patient visits or uses the services. A goal of CMS is to introduce a payment model for optimal medical care for Medicare beneficiaries.
The capitation system contrasts with the fee-for-service system, making healthcare affordable. Capitation provides a set amount to providers per patient, regardless of visit frequency, to promote cost control. FFS (fee-for-service) works on each service rendered, resulting in higher costs. Capitation focuses on preventive care and avoiding unnecessary procedures.
A healthcare provider holds a contract with an insurance company, HMO, or Medicare Advantage Plan. The payer pays a set amount for each registered patient, regardless of the level of care.
Let's say the provider is under a capitated contract with an HMO to receive $25 per beneficiary per month. In a capitated agreement, the provider has 200 patients and a predetermined payment of $5,000 (200 x 25) monthly to cover healthcare costs. This amount remains fixed, irrespective of how many times the patient visits. Some patients visit frequency is four times a month, while others do not visit at all.
The healthcare provider must deliver all contracted services to patients under the capitated agreement for similar or dissimilar treatments. Capitation payment is fixed and regular during that period. The Journal of Health Economics (2022) argued that distributed capitation payments reduce healthcare spending by 3-10% compared with fee-for-service, emphasizing preventive care over unnecessary hospitalizations.
The patients have a list of services under their healthcare insurance plan and are eligible to receive them under a capitated agreement.
Fee-for-service is widespread, but capitation falls through the cracks. A common approach in managed settings such as Medicare Advantage plans and HMOs. Basically, three types of capitation in healthcare, depending upon the scope of services and providers involved, to formalize the terms.
A primary care capitation covers routine and preventive care services. The standard arrangement requires the insurer to make direct payments to the provider.
This capitation model extends payments to specialists and diagnostic services, a fixed amount per member for specialized care. Financial risk is shared out of the provider’s funds with specialists, but the primary care provider remains liable for patient care. In 2024, Medicare Advantage enrollment exceeded 32 million beneficiaries. Most patients are reimbursed via capitation.
Comprehensive model covering a range of medical services from primary care to specialty care and hospital care. The services are for a network population. The payment model benefits providers with maximum financial exposure and control over the healthcare system.
For instance, an Accountable Care Organization is under a capitated contract with a health insurance company. The agreement includes primary care, hospital care, specialist care, laboratory tests, and outpatient procedures for 10,000 members. The insurer pays the ACO $500 per member, per month as a capitated payment.
$5,000,000 (10,000x$500) is the predetermined payment that covers all healthcare needs for these members, regardless of how many times they use the service. Let's say a member requires frequent specialist visits or a hospital stay, or undergoes surgical treatment. The ACO pays from the monthly global capitation payments. For another member, if they need an annual checkup, the cost is covered under a capitated agreement. Each capitation arrangement is distinct and uniquely aligns incentives.
The difference in the health status and the expected healthcare costs ensures providers receive fair compensation and is based on various factors:
Risk adjustments support healthcare needs for complex populations, promoting sustainability and fairness in provider payments.
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