HealthcarePatient Engagement

Capitation and Healthcare: Another Alternative to Fee for Service

How do you value healthcare?

That’s the age-old question American society grapples with from administration to administration. Everyone needs it, but can everyone afford it? Is healthcare a right, a privilege, or neither?

One thing we know for sure: the Centers for Medicaid and Medicare Services report that national health expenditures amounted to $3.2 trillion in 2015, an inconceivable 17.8% of GDP.

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So How Can We Improve?

Regardless of your convictions about health care, there’s no denying that health care reform is necessary, that the fee-for-service model of payment results in both more and less health care services prescribed.

When the primary mechanism of this model is the friction between insurers squeezing money from physicians in the form of discounted rates and physicians pushing back by over-prescribing expensive procedures for which insurers pay premiums, the victims are patients. Health care costs skyrocket, and no one gets healthier.

The burden of an inefficient, insufficient, and unhealthy health care system rests on everyone. That’s why Republicans and Democrats alike have foisted health care to the forefront of campaigns and legislative attempts to solve the problems plaguing nearly one-fifth of the economy.

“The health-care crisis in the United States is in many ways a pricing crisis,” Adam Davidson of The New Yorker writes in “A Bipartisan Way to Improve Medical Care.” In the face of reform, he advocates a healthcare reimbursement model configured on capitation, which inspires health maintenance and encourages cost savings. The replacement of a fee-for-service pay system with a per patient payment model, whereby the burden of objectively assessed successful health outcomes rests squarely on the shoulders of health providers, is a crowd pleaser. Both sides of the congressional aisle approve, according to Davidson.

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What Is Capitation?

It’s what managed care organizations use to keep costs under control by placing the fiscal responsibility of health care delivery on providers. Physicians control healthcare costs, without scrimping on services, in this reimbursement scheme. Payers, like insurance companies or government agencies, assess the costs of physician practices based on historical data, comparative local (regional) costs, and the range of services contracted under the capitation agreement (including referrals for diagnostic and subspecialty treatment). And then they pay physicians in advance a per-patient fixed amount for a certain period of time, say monthly or annually.  

Bonuses and annual risk pool (a set-aside portion of the capitation payments) residuals for successful plan performance are incentives for physicians to make the plan work while providing for specifically contracted services, typically:

  • Prevention, diagnosis, and treatment
  • Medication and immunization
  • Outpatient services
  • Lab tests
  • Health education
  • Counseling services
  • Routine screenings

What Are the Costs and Benefits of Capitation?

The benefits of capitation (unlike its failed attempt in the 80s and 90s  that led to HMO’s) are lowered healthcare costs without sacrificing patient care. In capitation pay models, doctors decide about patient care, not insurers.

With incentives to keep costs down, providers manage their practices to prescribe what they deem necessary, not only what’s going to pay the bills. Capitation also encourages newer delivery modes that increase patient satisfaction, such as telemedicine, which isn’t typically reimbursed under fee-for-service. But insurers and administrators also benefit from more predictable payments and expenditures.

The dangers, of course, harken back to the failed HMO models of earlier decades, when costs savings meant patients got fewer care choices and scaled-down services. Incentives to budget well might also lead doctors to take on too many patients, accept a disproportionate number of healthy patients, or make too many patient referrals to specialists (which don’t get deducted from the advance per-patient fee) in order to maximize profits.

All health care models balance competing costs and interests of individuals and society. The underlying assumptions to any health system should be patient health, understanding that a broken system of runaway costs affects health in a myriad of ways from added stress, restricted care, and economic burdens on everyone. There’s no simple solution, but perhaps one component of the big healthcare picture can be redressed with good conscience, improved budgeting, and fair pricing.

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