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Capitation is a sort of healthcare payment system in which an insurer or physician association pays a preset sum per patient for a certain length of time.

It pays a predetermined amount to the doctor, called as the primary care physician (PCP), for each registered patient, whether or not the patient seeks treatment. The PCP is often contracted with an independent practice association (IPA), a sort of health maintenance organization (HMO) whose purpose it is to acquire patients.

The reimbursement is calculated based on the average predicted healthcare use of each patient in the group, with higher utilization charges attributed to groups with higher expected medical demands.

The term capitation comes from the Latin word for caput, meaning head, and is used to describe the headcount within an HMO or similar group.

Examples of Healthcare Capitation

A capitation model would be an IPA that negotiates a charge of $500 per patient per year with an authorized PCP. For an HMO group of 1,000 patients, the PCP would be paid $500,000 per year and expected to provide all permitted medical services to the 1,000 patients for the whole year.

If a single patient uses $2,000 in healthcare services, the practice will lose $1,500 on that patient. On the other hand, if a person just utilizes $10 worth of healthcare services, the doctor stands to earn $490.

The model’s projected profitability is ultimately determined by how much health care the group is anticipated to need. Because patients with pre-existing diseases are often mixed together with younger, healthier patients, predicted earnings might occasionally diverge from actual profits.

Primary and secondary capitation linkages exist:

Primary capitation is an arrangement in which the IPA pays the PCP directly for each patient who chooses to utilize that practice.

Secondary capitation is when a secondary provider authorized by the IPA (such as a lab, radiology facility, or medical specialist) is utilized, the PCP’s enrolled membership is deducted.

There are also PCPs that work under a preventive health philosophy and are paid more for preventing sickness rather than treating it. The PCP would profit the most from this strategy by avoiding costly medical treatments.

Advantages of a Capitation System

HMOs and IPAs are the groups most likely to gain from a healthcare capitation system.

The main advantage for a doctor is lower accounting expenses. An IPA doctor is not required to have a bigger billing staff, nor is the practice required to wait for reimbursement for its services. By reducing these expenditures and difficulties, a clinic may serve more patients while maintaining a lower total operating expense.

The IPA has the advantage of discouraging PCPs from delivering more treatment than is required or from doing pricey procedures that may be no more effective than less expensive ones. It reduces the possibility of overbilling for operations that may or may not be essential.

The biggest advantage for the patient is that needless and frequently time-consuming treatments are avoided, which may result in greater out-of-pocket payments.

Cons of a Capitation System

One of the primary issues regarding healthcare capitation (as expressed by many HMO participants) is that it incentivizes physicians to enroll as many people as possible, leaving less and less time to actually visit a patient.

It’s not uncommon to hear an HMO patient complain about visits that take just a few minutes or physicians who provide diagnosis without ever touching or examining the patient.

While the overarching goal of capitation may be to prevent excessive expenses and spending (both of which might effect premium prices), this may be at the expense of the individual patient in need of increased treatment.

A medical practice may modify how it would normally treat a patient or implement rules that purposefully prohibit treatments to which the patient may be entitled in order to maximize profitability. It devolves into a sort of healthcare rationing in which the general level of treatment is decreased in order to maximize financial advantage.

There is evidence to support the idea that capitation is a more cost-effective and responsible healthcare strategy. According to a 2009 assessment of research, capitation was most cost-effective among populations with modest healthcare requirements, with practitioners reporting fewer illnesses and higher enrollments than fee-for-service practices.

In contrast, according to a study conducted by the Center for Studying Health System Change in Washington, D.C., as many as 7% of doctors actively reduced their services as a result of financial incentives, and the study concluded that “group revenue in the form of capitation was associated with incentives to reduce services.”