Understanding Capitation

Patrick C. Alguire, MD, FACP
Director, Education and Career Development

Capitation payments are used by managed care organizations to control health care costs. Capitation payments control use of health care resources by putting the physician at financial risk for services provided to patients. At the same time, in order to ensure that patients do not receive suboptimal care through under-utilization of health care services, managed care organizations measure rates of resource utilization in physician practices. These reports are made available to the public as a measure of health care quality, and can be linked to financial rewards, such as bonuses.

Capitation is a fixed amount of money per patient per unit of time paid in advance to the physician for the delivery of health care services. The actual amount of money paid is determined by the ranges of services that are provided, the number of patients involved, and the period of time during which the services are provided. Capitation rates are developed using local costs and average utilization of services and therefore can vary from one region of the country to another. In many plans, a risk pool is established 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 money is paid to the physician; if the health plan does poorly, the money is kept to pay the deficit expenses.

When the primary care provider signs a capitation agreement, a list of specific services that must be provided to patients is included in the contract. 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, but most capitation payment plans for primary care services include the following:

• 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

It is not unusual for large groups or physicians involved in primary care network models to also receive an additional capitation payment for diagnostic test referrals and subspecialty care. The primary care physician will use this additional money to pay for these referrals. Obviously, this puts the primary care provider at greater financial risk if the overall cost of referrals exceeds the capitation payment, but the potential financial rewards are also greater if diagnostic referrals and subspecialty services are controlled. Alternatively, some plans pay for test and subspecialty referrals via fee-for-service arrangements but are more typically paid via contractually agreed-upon fee schedules that are discounted 10% to 30%, compared to the local usual and customary fees.

Below is an example of a capitation rate schedule. It is for illustrative purposes only and does not imply a standard for comparison purposes. The jargon used by managed care organizations for the capitation rate is PMPM (per member, per month).

Other plans may have different schedules based on patient sex, different categories of ages, and different withhold amounts.

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