Capitation

Publication Date :

05 Mar, 2025

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Table of Contents

Capitation Definition

Capitation in medical billing refers to the payments received by physicians, clinics, or hospitals for the services they render. It is a fixed-payment system adopted by Health Maintenance Organizations (HMOs). The sole purpose of this payment is to reimburse the health providers for the service provided to the patients.

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The origin of this concept dates back to the late 1900s. In the 1970s and 1980s, the Medicare programs started including healthcare capitation in medical billing. However, they were decided one year in advance for the following year.

Key Takeaways

Capitation refers to the medical term used for payments done to providers for services provided to patients. Such providers include hospitals, physicians, and clinics.
The three types of payments include primary, secondary, and global capitation. This reimbursement is fixed and scheduled on a per-patient basis.
The HMOs are primarily responsible for providing this payment to providers. A partial payment resides in a risk pool that is further utilized to pay deficit expenses or transfer them back to providers.
The major disadvantage of this concept is that the provider may need to incorporate cheap quality drugs in the treatment process.

Capitation Explained

Capitation is a medical term used when HMOs provide fixed payments to health providers when treating patients. It is a fixed amount decided upon every patient. These payments appear in capitated contracts often agreed between health insurance companies and providers. It ensures that healthcare resources are efficiently utilized and patients do not receive under-average care. As a result, HMOs release such capitation payments to hospitals and physicians. However, there is also a risk pool associated with this system.

There are a few components or critical aspects of this concept that determine the fee rate. It includes payment structure, regional variance, incentives, risk pool, scope, and usage. The payment structure usually comprises a basic fixed amount payable per patient for a specific duration. However, this fee can have a regional variance depending on the location. For instance, the rates can be extremely high in regions with huge populations. As a result, HMOs develop a risk pool in cases where demand is uncertain.

In such areas, they try to save a portion of capitation payment in the risk pool. A more significant risk pool indicates the risk is evenly distributed among many members. Thus, if the health care is successful, the health care providers receive the entire money. However, in some cases, the older population may consume more services. As a result, chances of deficit may occur. Hence, as the plan performs poorly, the same amount is used to set off deficit expenses.

In addition to the above points, there are a number of services that can help you decide on this payment. Let us look at them:

Preventive and diagnostic services.
Immunizations
Counseling, therapy, and healthcare screening services.
Vision, hearing, and telehealth benefits.

Types

Technically, there are two types of payments provided by the HMOs. It includes primary, secondary, and global capitation fees. Let us understand them in brief:

Primary Payment - As the name suggests, the primary capitation payment occurs directly between the HMOs and primary care physicians. However, there is a preset number of services agreed to be provided by the physician. It includes preventive and diagnostic services, injections, medications, and immunizations overviewed by in-office health education and related counseling services, as well as outpatient laboratory tests performed at the office or laboratory for routine-based hearing and vision visits.
Secondary Payment - These payments are usually provided in the presence of secondary providers or specialists. Here, the HMOs arrange a payment system between physicians and such providers. For example, during X-ray, screening, and radiology tests, partial payment is made to secondary providers.
Global - Lastly, the global capitation covers the maximum patient population in general. It includes a fixed payment reimbursed for a total number of members over a particular network or region. Moreover, it includes all services provided by the providers.

Examples

Let us look at some examples of such healthcare payments to understand the concept in a better way:

Example #1

Suppose James owns a clinic and also works as a physician in California. In the past few years, since opening, he has received a lot of patients on a daily basis. However, at one point, it became tough to handle the crowd. As a result, he consulted Humming Healthcare to provide fixed payments. Thus, on every patient, James received around $200 per patient. And it would also cover health care expenses as well.

So, if James consults around 2000 patients in a week, the payment will be received in the same order. Now, the idea is that not all patients come with the same diagnostic issue. Some might utilize services of $150 or $3,000. Hence, taking an average assumption, the HMO releases a healthcare capitation fee of $200 on every patient visit.

Example #2

According to a recent news update as of April 2024, the Centers for Medicare & Medicaid Services (CMS) has announced a proposed draft of changes in capitation rates for 2025. The agency estimates an increase of 3.7% in the average revenues of the Medicare Advantage (MA) plan by next year. Also, the center has finalized updates for Part C and D payment policies and their ratings. For instance, the policy will include a Part D drug benefit as per the 2022 Inflation Reduction Act. However, feedback on the same from stakeholders is expected by April 29, 2024.

Pros And Cons

Following are the points explaining the pros and cons of this healthcare payment system to patients as well as providers. Let us look at them:

Pros	Cons
It discourages providers from employing unnecessary services in their profession.	In order to save costs, the health care providers tend to use poor or cheap quality drugs.
Further, it simplifies the bookkeeping process and reduces unwanted overhead costs.	They tend to reduce the services provided to patients.
It avoids unnecessary tests and procedures that can later increase the hospital bill for the patient.	In high-population areas, the capitation fee may be less.

Capitation vs Fee-For-Service vs Bundled Payment

Although capitation, fee-for-service, and bundled payment act as an incentive program for providers, they have differences between them:

Parameters	Capitation	Fee-For-Service	Bundled Payment
Meaning	It refers to a payment system provided to healthcare providers like clinics, hospitals, and physicians.	They are payment structures where the provider receives payment for each service rendered.	Bundled payment is a payment system where different providers reside in the same risk pool.
Type of payment	Fixed	Payment for each service	Single payment
Provided by	Health Maintenance Organizations (HMOs).	Health insurance companies or government payers like Medicaid or Medicare.	In most cases, CMS provides this payment to providers.
Risk associated	Here, the patient population is exposed to financial risk.	Limited risk and better flexibility in choosing and providing services.	Here, the risk gets shared among the providers.