What is Capitation? Understanding Capitation Payments in Healthcare

Instead of trying to code every item used for every procedure, the provider is paid a set amount for each patient. In the capitation model billing, the providers are paid for each enrolled patient based on per member per month. This is called the capitation premium, which is often referred to as the “cap”.

The transition from a fee-for-service model to value-based care has spurred healthcare leaders to reevaluate and realign their current payment models to meet organizational goals. In this blog, we’ll explore how capitated payments and reimbursement works as part of a larger strategy to provide quality care and reduce healthcare expenses. 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.

capitation in medical billing

Suppliers of drugs and devices spend heavily on sales and marketing to get onto approved lists, secure coverage at attractive prices, and persuade physicians to adopt their products. 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. 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.

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Many providers believe that the optimal financial payment model is capitation, supplemented by FFS capabilities, to create, maintain, and grow a practice, it is essential to have a valid payment system. The right payment plan depends on many factors such as region, Health Maintenance Organization , specialty, and patient demographics. Capitation, thought to be the more efficient payment system, is often compared to the traditional FFS payment model.

All the contents and articles are based on our search and taken from various resources and our knowledge in Medical billing. All the information are educational purpose only and we are not guarantee of accuracy of information. If you feel some of our contents are misused please mail us at medicalbilling4u at gmail dot com. Capitation payments have various advantages when it comes to the alternative—FFS. However, some providers may still opt for FFS given its advantages over capitation.

Insurance payments paid directly to the healthcare provider for medical services administered to the patient. The assignment of benefits occurs after a claim capitation in medical billing has been successfully process. Providers are reimbursed with a monthly rate per patient member regardless of how many services individual patients receive.

capitation in medical billing

Capitation payments control the use of healthcare resources by putting the physician at financial risk for patient services. 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.

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Dr. Joseph now sees why his new practice is using both a partial capitation model and a FFS payment model. This reduces some of the financial risk while still being able to bring a larger focus to quality care. Providers cannot afford reinsurance, which would further deplete their inadequate capitation payments, as the reinsurer’s expected loss costs, expenses, profits and risk loads must be paid by the providers. The goal of reinsurance is to offload risk and reward to the reinsurer in return for more stable operating results, but the provider’s additional costs make that impractical. Reinsurance assumes that the insurance-risk-transferring entities do not create inefficiencies when they shift insurance risks to providers.

This approach reimburses the primary care physician/group for each of the covered lives and requires that they act as a coordinator for additional care within the model. Managed care organizations use capitation payments in order to control the costs of care. This payment system regulates the use of healthcare assets and puts the physician at financial risk for services delivered to patients. Capitation payments are payments made to health care providers for providing services to patients. These payments are fixed and generally paid monthly (based on yearly contracts—i.e. capitation contracts). Whereas FFS laid the burden of financial risk on the payer, capitation presents an increased financial risk for healthcare providers.

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One major drawback of capitation is that it incentivizes physicians to spend less time with patients—i.e. At the same time, it’s been shown that capitation systems encourage doctors to reduce services. A Center for Studying Health System Change study found that 7% of doctors in a capitation system reduce services because there’s financial incentive to do so. The triple aim of healthcare framework designed by IHI and embraced by CMS aspires for better care for individuals, better health for populations, and lower cost of healthcare.

The capitation amount generally represents the expected cost to provide healthcare services to the attributed patients and is often stated as a per member per month amount. Global capitation works well with HMO’s because this type of health insurance covers a range of healthcare services in a predetermined network. It already reflects global capitation because payment is received per group member. Capitation holds many benefits for providers, but it has its own set of considerations.

  • This agreement lays out the details and expectations between the two, including the fixed amount of money to be paid to the health care provider.
  • 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.
  • Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018.
  • However, because providers are responsible for managing their patient populations’ healthcare costs, the use of utilization management techniques should be weighed against the ability to maintain quality objectives.

At the same time, in order to ensure that patients do not receive suboptimal care through the 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. 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 establishrisk pools as a percentage of the capitation payment. Capitation payments are fixed payments medical providers receive monthly for every patient enrolled in a health care plan.

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A type of insurance plan wherein patients are only eligible to receive health care within the insurance company’s network. HMOs and IPAS (See “Health Maintenance Organization ” and “Independent Practice Association ”) are examples of the managed care system. Dr. Joseph has just joined an accountable care organization , which is a group of medical providers that will coordinate their care for Medicare patients in hopes to improve the quality of care that patients receive.

Challenges with Capitation-Based Models

Capitation agreements will provide a list of specific included services in the contract. It is used by physician associations or insurers to pay hospitals or doctors per enrolled patient for a specific amount of time. The provider receives payment for each member every month they’re enrolled. Medicaid provides insurance coverage to low-income families and individuals. It is essentially an insurance program for those who cannot afford full insurance coverage. Medicaid is funded at state and federal levels, but each state has it’s own version of Medicaid that must operate above the minimum requirements established by federal law.

The predetermined fee is calculated based on how much cost each member is expected to incur for care delivery over a year’s span. Therefore, it’s up to the healthcare provider and insurer to predict the resources and utilization that will be used under this capitation payment model to better manage spend. In an ever-changing healthcare world, the MCP places almost all of the risk on the healthcare providers. In a Fee-for-Service plan, doctors are encouraged to order a higher number of tests and procedures, therefore placing the risk on the patient and insurance companies. There has been a decline in Fee-for-Service systems in the last decade as new capitation systems provide more certainty to both providers and payers.

Here we compare capitation and FFS, simplifying the advantages and disadvantages of each to determine whether or not it’s a feasible plan for your practice. Providers who work under such plans focus on preventive health care, as there is a greater financial reward in the prevention of illness than in the treatment of the ill. 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. The capitation model discourages PCPs from delivering more or conduct unnecessary procedures thus alleviating the risk of excessive medical billing.