What is capitation?
Capitation is an alternative payment model in which healthcare providers are paid a fixed rate per person, per month (usually prospectively) to cover all care within a specified scope of services plus administrative costs, regardless of the number of services they provide. Groups of providers who deliver care for less than the capitated rate can share in the savings, while those who deliver care for more than the capitated rate are responsible for the overage. “Upside” and “downside” risk encourages providers to coordinate care and make cost-effective treatment decisions.
Capitation emerged in the mid-to-late 1990s as an instrument used by managed care organizations to control skyrocketing healthcare spending.1 While this early experience saved money, barriers to access and financial strain on providers caused the approach to be abandoned in many parts of the country for a time.2 Today, capitation is back in favor using updated approaches. Payers deploying this strategy attempt to leverage its advantages – the incentive to keep patients healthy, the incentive to deliver care efficiently and flexibility with respect to care delivery. To combat the possibility that providers may inappropriately limit consumers’ access to services in attempt to save money, payers commonly link the payments to quality measures.
There are two kinds of capitation models:
What does the evidence say?
A 2014 literature review concluded that capitation encourages physicians to be more financially responsible in the selection of services provided to patients and the supplies used in surgical procedures.3 In some areas of healthcare, lesser use of physicians’ services was observed. Additionally, numerous studies found evidence that capitation lowers healthcare costs compared to fee-for-service payments,4 although lower costs do not necessarily translate to lower overall healthcare spending in markets with a high prevalence of capitation.5
Studies of Maryland’s all-payer rate setting program, which capitates payments for all acute care hospitals operating in the state, show that the payment strategy has lowered the rate of per capita hospital spending growth, reduced potentially preventable complications and hospital admissions and lowered out-of-pocket costs for Medicare beneficiaries with no negative affect on patient experience and hospital financial performance. However, increases in Emergency Department use were also observed.6
In the private sector, global capitation as part of Blue Cross Blue Shield of Massachusetts’ Alternative Quality Contract7 (AQC) slowed growth in medical spending on claims. Early savings were driven by lower prices, followed by lower utilization of services – including use of laboratory testing, certain imaging tests, and emergency department visits – over time. Eight years after the AQC’s introduction, savings exceeded incentive payments to providers, with no negative impact on quality of care.
It is important to recognize that not all providers are organized in a way that is amenable to succeeding under capitated payment models. Providers are more likely to achieve savings if they are sophisticated and prepared to deliver effective care management, eliminate low-value services and closely monitor medical costs.8 Care coordination (an important component of effective care management) may be easier for providers embedded within an integrated care delivery organization — a network of providers that offer a continuum of care to a specific population and are held accountable for clinical/financial outcomes. Some have expressed concern that increasing the prevalence of capitated payment arrangements may encourage provider consolidation into these large, integrated care delivery organizations, decreasing competition.
Capitation represents one end of the bundled payment spectrum that ranges from pure fee-for-service to global capitation. For more information on bundled payments, see: https://www.healthcarevaluehub.org/improving-value/browse-strategy/bundled-payments.
1. Frakt, Austin B. and Rick Mayes, “Beyond Capitation: How New Payment Experiments Seek To Find The ‘Sweet Spot’ In Amount Of Risk Providers And Payers Bear,” Health Affairs, Vol. 31, No. 9 (September 2012).
2. James, Brent C. and Gregory P. Poulsen, “The Case for Capitation,” Harvard Business Review (July 2016).
3. Paul III, David P. et al., "How Effective is Capitation at Reducing Health Care Costs?" Marshall University, South Charleston, W.V. (November 2014).
5. Delbanco, Suzanne F., “The Payment Reform Landscape: Capitation with Quality,” Health Affairs Blog (June 6, 2014).
6. Sharfstein, Joshua M., Elizabeth A. Stuart, and Joseph Antos, “Global Budgets in Maryland: Assessing Results to Date,” JAMA, Vol. 319, No. 24 (June 2018).
7. Song, Zirui, et al., "Health Care Spending, Utlization, and Quality 8 Years into Global Payment," New England Journal of Medicine, Issue 381 (July 18, 2019).
8. Gracey, Deborah et al., "Health Care Providers and Value-Based Reimbursement," Health Management Associates, Washington, D.C. (April 2015).