Capitation, in the United States health care system, refers to a method of paying health care service providers (ie. doctors). Generally these providers are contracted with a type of HMO known as an independent practice association (IPA). The HMO contracts with the providers to have the latter take care of patients enrolled in the HMO. Most often, payment for such a service is under the capitation system.

Under a capitation system, healthcare service providers (physicians) are paid a set amount for each enrolled person assigned to that physician or group of physicians, whether or not that person seeks care, per period of time.

The amount of remuneration is be based on the average expected health care utilization of that patient (more remuneration for patients with medical history). Other factors considered include age, race, sex, type of employment, and geographical location (1).

[edit] Implications

Quality of care

Since capitation does not reimburse physicians any more for taking care of their patients, and visits and procedures cost money, the contracting physicians essentially lose money for each visit or procedure. This situation incentivizes the physicians to reduce the effort spent on each patient, which may result in in an overall reduction of time spent on each patient, which is just the case in most private practice. The corollary practices are to under-prescribe, under-diagnose, and under-treat patients to reduce costs, and therefore maximize net profit. (Of course, physicians cannot ethically refuse to see a patient on the basis of the capitation payment schedule.) As such, this is an effort of insurance companies and large corporations to reduce health care costs.

Compare this to the traditional fee-for-service reimbursement, where there is a tendency to over-prescribe, over-diagnose, and over-treat to secure more revenue since physicians earn a net profit on each visit, and procedure.

Some physicians would blame the resulting misalignment of interests on the contracting HMO for being restrictive and providing poor incentives, while some HMO's would redirect the blame back to the physicians for making the actual decisions that they believe are flawed. In reality, it is the interaction of the interests of these two groups that creates the problems we see today, with both sides contributing responsibility.

Type of care

Providers who work under these plans focus on preventive health care as it is far less expensive to keep a person from becoming ill than it is to treat them once they are ill.

Providers shift away from performing expensive, newly developed, and/or less effective treatment options that may have only a marginally higher success rate than alternatives.

Insurance

The financial risks providers accept in capitation are traditional insurance risks. Since providers have fixed revenues, each enrolled patient makes his/her claims against the full resources of the provider (the value of the capitation). Providers, in lieu of a fixed payment per enrolled client, agree to provide the unknown future costs associated with clinical care. This shift means that the providers become the enrolled client's insurers, resolving claims for care in face-to-face interactions, at the point of care. Hence, capitation places health care providers in the role of micro-health insurers, assuming the responsibility for managing the unknown future health care costs of their patients.

Large providers often have the resources and scale to manage such risks better than smaller providers, in the sense of predicting costs, saving excess money and securing loans, than small insurers. Small providers, like individual consumers, tend to have annual costs that fluctuate far more than larger insurers as a percentage of their annual cash flow. For example, capitated eye care programs of under 10,000 patients covered may collapse due to the risk of a few major incidents arising (1). Physicians and other healthcare providers generally do not have expertise in the field of finance, liquidity, and insurance and thus suffer from a comparative disadvantage in relation to insurance companies. Because of the greater risks that small providers bear, they can only remain competitive by receiving more fees through capitation. Of course, the HMO's have good reason not to contract with providers who require more remuneration.

Finally, because physicians often find themselves not earning enough money as it is, they often are unwilling to buy reinsurance as this would eliminate the portion of their profits that comes from the risk premium. Those physicians who do buy reinsurance find it in their best interest to trade risk and reward for stability. Reinsurers are wary of contracting with physicians due to the moral hazard problem.

[edit] See also

• Fee-for-service
• HMO
• Insurance

[edit] External links

• Understanding Capitated Delivery Systems - Includes a history of capitation.