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=Healthcare Capitation=

What is Healthcare Capitation & How is It Used?
Capitation is a healthcare payment system that is used to control healthcare costs. Capitation is a fixed amount of money per patient that is paid in advance to clinicians or facilities for certain services that they may perform. The traditional healthcare payment model (fee-for-service) pays clinicians for each visit, diagnostic test, or procedure they perform. The purpose of capitation is to tie a clinician’s or health system's performance to the health of the patient. Capitation pays a monthly fixed fee for all patients in a plan, and focuses on keeping patients healthy through the use of preventative screenings and primary care. Specialty services are only available to the patient, after the patient has been evaluated by their primary care physician. Capitation payments can be paid to specialists but are most often payment agreements between health plans and primary care physicians and facilities performing routine tests. Capitation agreements vary among plans but usually preventative and treatment services performed within the office as well as immunizations and routine laboratory testing can be handled with capitation.

There are two types of capitation models global capitation and partial or blended capitation. Under the global capitation model an entire network receives a monthly payment per member (referred to as a PMPM). The network then determines how to divide the payment among the physicians and facilities. An example of the global capitation is Kaiser. Under the partial or blended model the capitation PMPM payment arrangements only exist for certain provider types or services (e.g. primary care and labs), while specialties like urology may or may not be done through capitation and can remain fee-for-service.

Capitation Payment Calculation
Derived from the term “per capita” meaning per person, capitation is calculated as a fixed payment amount per plan member cared for per time period for a predefined set of services. Often this means per month, referred to as per member per month (PMPM), but can vary depending on the services provided. The per capita amount is determined by the set of services to be provided, the number of patients to be served, and the time period for the services to be provided. Rates are calculated using local or regional costs and utilization averages, so will be highly contextual to the area the service is provided. These payments are made in advance of services provided, and kept by the provider regardless of utilization of services by the members, making it a predictable and timely income for providers.

Some capitation plans stratify their payments based on age and gender, while others base their payments on a percentage of the insurance premiums charged to the health plan’s members instead of the fixed rate per member. The latter poses increased risk to the provider since their payment is based on what the health plan determines to charge, so can result in a lower payment if the health plan decides to cut its premiums.

For example, a primary care physician may receive $50 per member per month for providing services to an HMO plan’s 100 members, resulting in the physician receiving $50 x 100 x 12 = $60,000/year in capitation payments from that HMO. Unlike a fee-for-service model, regardless of the volume of services, the amount of the payment is always the same. Therefore, profitability is achieved with capitation payments through lower volume utilization and more cost-effective treatments, incentivizing efficiency, at the risk of confounding economics and care where providers are rewarded for withholding care or providing lower quality less expensive care. When members over utilize services or choose more expensive treatments, providers bear the financial burden beyond the set payment amount.

In addition to this set capitation payment, it is normal for plans to withhold a portion of the payment as part of a “risk pool”. This pool is held in escrow by the plan until the end of the fiscal year, and released to the physician only if the health plan does financially well for the year. In other words, if the physician provides efficient cost-effective care and the health plan does not incur additional unanticipated expenses, the physician will receive this “bonus” payment. Otherwise, the money in the risk pool is used by the health plan to cover the additional costs of services provided to the members under this provider. This serves as a type of insurance for the health plan itself to protect its viability over the long term.

Sometimes providers and health plans will negotiate a shared risk model for losses incurred by the provider for over-utilization of services. In this case, the health plan would agree to pay a percentage of the losses to the provider. In the case that a lower volume of services was provided than expected, the provider would pay a percentage of that profit to the health plan.

Advantages of Capitation
Capitation focuses on keeping costs low by discouraging unnecessary treatment, especially those with little benefit. It also works to balance out the costs of frequent users of healthcare and those of patients who do not normally use services. In theory, capitation provides incentives for providers to keep members healthy in order to keep costs low. Providers are motivated “to provide health screenings (mammograms, pap smears, PSA tests), immunizations, prenatal care, and other preventive care to enrolled members, and to focus on keeping the member healthy through good primary care (and less reliance on costly medical specialists).” This is on the basis that healthier patients require less clinical services, reducing caseloads for providers who are paid regardless of whether or not their patients use their services. Furthermore, capitation can be easier to handle administratively as the billings for different services and procedures are instead consolidated into a flat fee for each patient. Capitation also makes costs more predictable for the consumer and provides a more consistent source of income for the provider.

Disadvantages of Capitation
Capitation has disadvantages as well as advantages. While providers may be pushed to provide only necessary services, they may also have an incentive to limit the amount of services for a patient to avoid additional operating costs; under that same rationale, physicians may also be more inclined to provide less costly treatments rather than more effective options or direct patients to specialists to save time and costs. In addition, physicians would have greater incentive to opt for enrolling healthier patients, who would require less time and services, rather than those with severe medical needs. For patients, not only may they receive “less than optimal care,” but they can face some difficulty in switching to a doctor of their choice. Finally, there can be high administrative costs in compiling the list of enrolled patients, “negotiating contracts, setting capitation rates and formulas, and monitoring physicians [for quality of care].”