Capitation is a type of a healthcare payment system in which a doctor or hospital is paid a fixed amount per patient for a prescribed period of time by an insurer or physician association.

It pays the doctor, known as the primary care physician (PCP), a set amount for each enrolled patient whether a patient seeks care or not. The PCP is usually contracted with a type of health maintenance organization (HMO) known as an independent practice association (IPA) whose role it is to recruit patients.

The amount of remuneration is based on the average expected healthcare utilization of each patient in the group, with higher utilization costs assigned to groups with greater expected medical needs.

Close up of hand holding a stethoscope

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

An example of a capitation model would be an IPA which negotiates a fee of $500 per year per patient with an approved PCP. For an HMO group comprised of 1,000 patients, the PCP would be paid $500,000 per year and, in return, be expected to supply all authorized medical services to the 1,000 patients for that year.

If an individual patient utilizes $2,000 worth of healthcare services, the practice would end up losing $1,500 on that patient. On the other hand, if an individual uses only $10 worth of healthcare services, the doctor would stand to make a profit of $490.

Projected profitability for this model is ultimately based on how much health care the group is likely to need. Given that patients with pre-existing conditions will be often mixed with younger, healthier ones, the expected profits can sometimes converge from the actual profit.

There are both primary and secondary capitation relationships:

Primary capitation is a relationship in which the PCP is paid directly by the IPA for each patient who decides to use that practice.

Secondary capitation is one in which a secondary provider approved by the IPA (like a lab, radiology unit, or medical specialist) is paid out of the PCP's enrolled membership when used.

There are even PCPs contracted under a preventive health model who receives greater financial rewards for preventing rather than treating illness. In this model, the PCP would benefit most by avoiding expensive medical procedures.

Pro

Simplifies bookkeeping

Discourages excessive billing or more costly procedures

Patients avoid unnecessary tests and procedures

Con

Providers may spend less time per patient

Incentivizes providing fewer services

Benefits of a Capitation System

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

The chief benefit for a doctor is the decreased costs of bookkeeping. A doctor contracted by an IPA does not have to maintain a larger billing staff, nor does the practice have to wait to be reimbursed for its services. Alleviating these costs and hassles can allow a practice to treat more patients at a lower overall operating expense.

The benefit to the IPA is that it discourages PCPs from providing more care than is necessary or using costly procedures that may be no more effective than inexpensive ones. It alleviates the risk of excessive billing for procedures that may or may not be necessary.

The main benefit to the patient is the avoidance of unnecessary and often time-consuming procedures that may trigger higher out-of-pocket expenses.

Drawbacks of a Capitation System

One of the main concerns about healthcare capitation (and a complaint echoed by many enrollees in HMOs) is that the practice incentivizes doctors to enroll as many patients as possible, leaving less and less time to actually see a patient.

It is not unusual, for example, to hear an HMO patient complain about appointments lasting for no more than a few minutes or doctors offering diagnoses without ever touching or examining the patient.

While the broader aim of capitation may be to discourage excessive costs and spending (both of which can affect the cost of premiums), it may do so the detriment of the individual patient in need of enhanced care.

To increase profitability, a medical practice may alter how it would otherwise treat a patient or instigate policies that actively exclude procedures to which the patient may be entitled. It becomes a form of healthcare rationing by which the overall level of care may be reduced to achieve greater financial gain.

Some argue that capitation is a more cost-efficient and responsible healthcare model, and there is evidence to support this claim. A 2009 review of studies reported that capitation was most cost-effective in groups with moderate healthcare needs, with practices reporting fewer illnesses and more enrollments than fee-for-service practices.1

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