What Are Capitation Payments?

Capitation payments are fixed payments to a medical provider from a state or a health plan. These payments are paid monthly for each member enrolled in the health care plan. No matter how many times the member visits the provider during the year, the payment amount doesn’t change.

Compared to a fee-for-service model of medical billing, capitation payments can help reduce waste and prevent rising health care costs. However, it puts financial risk on health care providers instead of on insurance companies. Let’s explore capitation in more detail to help you better understand the pros and cons of this type of medical billing.

Definition and Examples of Capitation Payments

A capitation payment is a fixed amount of money paid in advance to a medical provider by a state or health plan for an agreed amount of time.

• Alternate name: Capitation fee, capitation rate
• Acronym: PMPM (per member, per month)

Some health care plans and states make capitation agreements with medical providers. As part of this agreement, the medical practice receives a certain amount of money each month for each enrolled member, which is the capitation payment.

How Capitation Payments Works

Capitation payments are common in health maintenance organizations (HMOs) and Medicaid-managed care organizations (MCOs). The primary care provider receives a certain amount of money for each member enrolled in the health care plan, and the provider agrees to take care of their covered medical needs for this amount.

The specific amount of the payment is defined in the capitation agreement. This number is based on local medical costs, so it may vary from region to region. Capitation rates can also be based on gender, age, and other factors.

The provider receives payment for each member every month they’re enrolled.

Let’s say a medical practice receives $300 per month for each enrolled member younger than 12 months old. If this practice had 50 patients in that category, it’d receive $15,000 a month to provide the necessary care for them.

Since there is no extra billing for services, the financial risk is on the medical practice. If it can provide care for less than $15,000 a month, the practice profits. But if it can’t provide care for that amount, it loses money.

Many capitation payments also include a risk pool. This is an agreed-upon percentage of the payment that gets set aside. These funds can be used to pay for specialists and to help cover any deficits. Any surplus from the risk pool is split between the health plan and the providers at the end of the contract term.

What Do Capitation Payments Cover?

The capitation agreement includes a list of covered services that the provider must give to each member as part of the capitation fee. While the exact services vary from agreement to agreement, here are a few commonly covered services:

• Preventive care and diagnostic services
• Routine injections and vaccines
• Outpatient tests in a designated lab or the office
• Routine vision and hearing screens
• In-office counseling and health education services

Some medical treatments fall outside of the scope of the capitation agreement. These “carve-out services” are handled differently in billing, based on the terms of the contract. Common carve-out services include:

• Behavioral/mental health
• Dental care
• Vision
• Pharmacy

Health care providers often “carve out” services they aren’t experienced at managing. These services also protect public health care providers, which often specialize in carved-out care.

Capitation Payments vs. Fee-for-Service (FFS)

Capitation and fee-for-service (FFS) are two common medical billing systems. Here’s a quick look at the main differences between them.

With fee-for-service billing, a patient goes into a clinic and the doctor bills for all services performed. If a patient isn’t seen, the doctor doesn’t bill for services for that patient. In contrast, capitation payments are provided for every enrolled member, even if that patient never comes in for an exam or treatment.

The actual billing process differs between the two, as well. With FFS medical billing, each procedure must be appropriately coded and often justified, so the health insurance company pays the bill.

In contrast, with capitation payments, the administration process is simpler. Instead of trying to code every item used for every procedure, the provider is paid a set amount for each patient.

Another benefit of capitation payments over FFS is that it reduces the possibility of doctors recommending unneeded medical care to increase their payment. That’s because they assume more of the financial risk if the cost of services exceeds capitation payments.

However, a drawback of capitation payments is the possibility that doctors won’t recommend needed care because the capitation payment wouldn’t cover the full cost of services. Doctors may also be inclined to avoid enrolling patients to save costs.

Each type of medical billing system has pros and cons for patient care. If you’re deciding which type of plan to enroll in—one that uses a capitation method of payment or one that uses FFS—consider how each might affect the quality of care you need.