What Are Capitation Payments?

Capitation payments are payments agreed upon in a capitated contract by a health insurance company and a medical provider. 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.

How Capitation Payment Plans Work

Rates for capitation payments are developed using local costs and average utilization of services, and therefore, can vary from one region of the country to another. Many plans establish risk pools as a percentage of the capitation payment.

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.

Key Takeaways

  • A capitation is a fixed-amount type of health care payment system. 
  • It used by physician associations or insurers to pay hospitals or doctors per enrolled patient for a specific amount of time.
  • HMOs and IPAs may likely reap benefits from operating in a healthcare capitation payment system.
  • Capitation payments are designed to lower the high costs of healthcare.

The amount of the capitation will be determined, in part, by the number of services provided and will vary from health plan to health plan. Most capitation payment plans for primary care services include basic areas of healthcare.

  • Preventive, diagnostic, and treatment services
  • Injections, immunizations, and medications administered in the office
  • Outpatient laboratory tests done either in the office or at a designated laboratory
  • Health education and counseling services performed in the office
  • Routine vision and hearing screening

Under a capitation agreement, a list of specific included services must be provided to patients in the contract.

Special Considerations

Capitation payments are defined, periodic, per-patient payments (usually monthly) for each individual enrolled in a capitated insurance plan. For example, a provider could be paid per-month, per-patient, despite how many times the patient comes in for treatment or how many services are needed. Capitation programs can cover individuals or families. HMOs and IPAs often use capitation programs.

The payment varies depending on the capitation agreement, but generally, they are based on characteristics such as the age of the individual enrolled in the plan. Modifying the plan, according to specific characteristics for groups of patients, is one way to compensate providers for the medical care expected for similar ailments within a group.

Health insurance companies use capitation payments to control health care costs. Capitation payments control the use of health care resources by putting the physician at financial risk for patient services.

At the same time, in order to ensure that patients do not receive suboptimal care through under-utilization of health care services, insurance companies measure rates of resource utilization in physician practices. These reports are publicly available and can be linked to financial rewards, such as bonuses.