Capitated Contract

What Is a Capitated Contract?

A capitated contract is a healthcare plan that allows payment of a flat fee for each patient it covers. Under a capitated contract, an HMO or managed care organization pays a fixed amount of money for its members to the health care provider. Capitated contracts are also referred to as capitation agreements, capitation contracts and managed care capitated contracts.

  • A capitated contract is a health care plan that pays a flat fee for each patient it covers.
  • Under a capitation agreement, the doctor is paid a fixed monthly rate in exchange for offering their services to plan members at a reduced or no cost.
  • Capitated payments do not account for individual patient requirements, or the number of times they see the doctor.
  • Capitated contracts are common among HMOs or managed health care organizations.

Understanding Capitated Contracts

Within a capitated contract, the healthcare provider is paid a set dollar amount per month to see patients regardless of how many treatments or the number of times the physician or clinic sees the patient. The agreement is that the provider will get a flat, prearranged payment in advance per month. Whether or not the patient needs services in a particular month, the provider will still get paid the same fee. The more treatment a patient needs, the less money a health provider makes per treatment.

Traditionally, payers have reimbursed healthcare providers for the costs of services delivered or for the volume of services delivered. However, new types of healthcare plans are moving from paying for volume to paying for value—incorporating cost, consumer health outcomes, and consumer experience—with capitation rates based on performance at the “most advanced” end of the scale.

Capitation-style healthcare contracts were created with the intention of creating better incentives for efficiency, cost control, and preventive care in healthcare. Given that most individuals enrolled in a health plan will never use the services in any given month, capitation arrangements should naturally balance out high-frequency users with plan members who use little or no healthcare every month.

Also, because the physician, hospital, or health system are responsible for the enrolled member's health regardless of cost, in theory, capitation motivates the healthcare provider to focus on health screenings (mammograms, pap smears, PSA tests), immunizations, prenatal care, and other preventative care that can help keep plan members healthy, with less reliance on costly specialists.

Capitation contracts pay doctors a flat fee for each patient, no matter how many times that patient sees the doctor.

Capitated Contract Example

Consider a capitated contract issued by Company ABC that pays a doctor $100 per month for every patient it covers in XYZtown. In exchange for this monthly payment, the doctor agrees to serve every member of plan XYZ at a reduced rate or no rate if they require medical services. Company ABC has 200 patients in ABCtown, so the doctor will get $20,000 a month.

The doctor receives the same monthly payment, whether or not the patients actually see the doctor in that month. On the other side of it, the doctor will receive only $100 per month, per patient, no matter how many times a given patient decides to see the doctor.

A doctor who engages this type of contract undertakes a certain amount of risk, since it is possible that the cost of serving these patients will exceed their $20,000 capitated payments. In theory, this system should encourage doctors to emphasize preventive medicine practices, that can prevent greater expenses down the road. However, in some cases, it results in patients receiving poorer care.

What Does Capitation Mean?

Capitation refers to a fee or tax that is leveled on a per-person basis, without distinguishing between individual needs or income. For example, poll taxes or drivers' license fees are paid on a capitation basis: everyone pays the same amount.

What Is Capitation in Accounting?

In accounting, a capitation fee is a fixed monthly payment to a healthcare provider in exchange for a commitment to serve the members of a healthcare plan. This fee is based on the number of patients the provider agrees to serve, regardless of how many patients actually seek services in any given month.

What Is a Capitated Health Plan?

A capitated health plan is a plan that offers capitated contracts to health care providers. Frequently associated with HMOs, these managed care plans pay doctors and other providers on a per-patient basis, whether or not they actually see patients in a given month.

What Is a Capitation Payment?

A capitation payment is a monthly payment to a healthcare provider, based only on the number of patients that the provider commits to serve. Capitation payments are on a flat-fee basis, meaning they do not account for the specific needs of any one patient or the number of times the provider sees them.

What Kind of Dental Plan Offers Its Service on a Capitation?

Some dental plans offer services on a capitation basis, similar to an HMO. These are known as Dental HMOs.

Why Have Doctors Been Hesitant to Sign Capitated Contracts?

Capitated contracts are risky for health care providers because it is not immediately clear how many resources will be expended on each payment. Because they receive a per-patient fee, it is possible that some patients will end up costing the doctor more money than they receive in payment. Moreover, since some capitated plans cater to low-income patients, they may also have more health problems than the average population.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Merriam-Webster. "Capitation Definition." Accessed Jan. 15, 2022.

  2. AccountingTools.com "Capitation Fee Definition." Accessed Jan. 15, 2022.

  3. American Dental Association. "Capitation/Dental HMOs." Accessed Jan. 15, 2022.