Revenue-wise, running a medical practice is very uncertain. Why? Well, some days you get a lot of patients, while some weeks you barely do anything. As you can imagine, the revenue in healthcare is tied to the number of patients. In a fee-for-service (FFS) environment, a slow week means lower income, while high patient volume means more income. This unpredictability is very hard to deal with for financial planners.
As a solution, often ‘capitation’ is cited. Capitation in medical billing is another form of payment that healthcare providers can get from insurance payers. In this payment model or system, providers receive a fixed amount from payers for all services rendered to a patient, regardless of the number of visits or encounters.
Therefore, in today’s guide, we will discuss in detail what capitation or fixed capitation in medical billing is, how it works, the types available, and some challenges with it. So, let’s start.
Capitation in Healthcare
Capitation in healthcare is defined as:
“A way of paying healthcare providers or organizations in which they receive a predictable, upfront, set amount of money to cover the predicted cost of all or some of the healthcare services for a specific patient over a certain period of time.”
The definition explains one thing very clearly, i.e., payment is prospective and fixed, not tied to the number of services rendered. In other words, when providers opt for this model, the payment is a set dollar amount per enrolled member per month (PMPM), and the provider agrees to deliver all covered services within that contract scope, regardless of how often or how rarely each patient visits.
Capitation payments in healthcare are usually used by health maintenance organizations (HMOs), accountable care organizations (ACOs), and Medicaid managed care organizations (MCOs).
Additionally, the American College of Physicians (ACP) states that for most capitation plans, rates are set using local costs and average service utilization, which means rates can vary significantly from one region to another. Also, in risk pools, physician payments are withheld until the end of the year. So, if the health plan performs well financially, physicians are paid, and if the performance is poor, the money is kept to pay off the deficit.
Types of Capitation in Medical Billing
What’s important to note is that capitation in medical billing isn’t always the same. The model is structured in three different ways. Here is a brief description of each of them:
Primary Capitation
Primary capitation is a relationship between a managed care organization and a primary care physician (PCP). The MCO pays the PCP directly for each plan member who selects that physician as their primary care provider.
The PCP is responsible for delivering primary care services covered under the contract and is compensated on a per-member-per-month basis regardless of visit frequency.
Secondary Capitation
Secondary capitation involves a relationship arranged by the MCO between the PCP and a secondary or specialist provider, such as a radiology facility, a diagnostic lab, or a durable medical equipment supplier.
In this payment system, the secondary provider receives capitation payments from the PCP’s enrolled membership base. This simply means that the PCP’s panel determines what the specialist earns, not the volume of referrals made.
Global Capitation
This is the most comprehensive type of capitation in medical billing. In this, a provider organization or integrated health system receives a single PMPM payment that covers the full spectrum of care for a network population, including hospital services, specialist visits, and ancillary care.
Global capitation places the greatest financial risk on the provider but also offers the greatest potential reward when costs are managed efficiently.
Capitated Payment Models
Now, let’s briefly discuss the payment models. The payment models are, in simple words, structured agreements between payers and healthcare providers. These agreements are made to replace the service-based billing with prospective, population-based payments.
The defining features of any capitated payment model include:
- A predetermined monthly payment rate, expressed as PMPM.
- A contract defining the scope of covered services.
- Risk-sharing arrangements, sometimes including risk pools or quality withholds.
- Carve-out provisions for high-cost or specialty services not covered under the capitation rate.
The working mechanism of capitation in healthcare is quite simple. The insurance payer, let’s say Medicare, registers patients in an insurance plan. They then assign them to a healthcare provider. Based on this plan, the insurer then pays that provider a fixed monthly amount for each assigned member, regardless of whether those members seek care during the month.
So, when a patient’s care costs fall below the capitation payment, the provider retains the surplus. When costs exceed the payment, the provider absorbs the loss. However, certain highly specialized or high-cost services can be excluded from this arrangement, and the insurance payer can bill them separately.
Capitation Examples in Medical Billing
To better understand capitation in medical billing, let’s look at a couple of real-world scenarios.
Primary Care Capitation in an HMO
For our first scenario, suppose that a family medicine practice gets into a contract with a regional HMO. According to the agreement plan, the HMO assigns 800 members to the practice and agrees to pay $35 per member per month. So, in total, the practice receives $28,000 every month, regardless of how many of those members schedule visits.
During a high-utilization month following a flu outbreak, when patient volumes spike, the reimbursement remains the same. So, to keep the income steady, the practice will have to manage the costs internally.
Medicaid Managed Care Capitation
Suppose a primary care clinic participates in a state Medicaid managed care program. The state contracts with an MCO, which in turn caps the clinic at $28 PMPM for its assigned Medicaid population. In the contract, the MCO has carved out behavioral health and pharmacy services from the capitation contract. So, these services are paid separately.
The clinic, on the other hand, is responsible for all other covered primary care services. If the clinic manages the panel efficiently and keeps costs below the capitation rate, it retains the difference. If costs exceed the rate, the clinic will have to bear the loss.
Capitation vs. Fee-for-Service Payments
Both capitation and fee-for-service payment methods are used in medical billing frequently. Both have their merits and demerits. We have provided a table below that compares both payment methods:
| Feature | Fixed Capitation | Fee-for-Service |
|---|---|---|
| Payment Basis | Fixed PMPM per enrolled member. | Per service rendered. |
| Revenue Predictability | High. Income is stable each month. | Low. Revenue fluctuates with volume. |
| Financial Risk | Provider bears the risk if patient costs exceed the cap rate. | Low risk for both payer and healthcare provider. |
| Care Incentive | Preventive care; reduce unnecessary utilization. | Volume-driven; more services = more revenue. |
| Billing Complexity | Lower claims volume; more contract and attribution management. | High; every service requires a separate claim submission. |
| Common Setting | HMOs, Medicaid MCOs, ACOs. | Medicare Part B, commercial PPOs. |
| Impact on Coding | Coding supports risk adjustment and quality metrics, not reimbursement per claim. | Coding directly determines payment on each claim. |
Capitation Challenges in Medical Billing
Like everything else, capitation in medical billing has its own challenges. Here are the key ones:
- If a healthcare provider works with a capitation payment system, they deal with more insurance payment risk. What we mean by this is that, if the assigned monthly patient panel has many complex, chronic patients, the cost of care can quickly exceed the PMPM payment. This is especially true for small practices.
- In capitation, there is a process called Risk Management. This process decides the capitation rates. If coders undercode chronic conditions or fail to document patient complexity accurately, the plan assigns a lower risk score, which in turn results in a lower PMPM payment.
- If patients are incorrectly assigned, or roster updates lag behind real enrollment changes, the practice either gets paid for patients it is not serving or serves patients for whom it receives no payment.
Wrapping Up
Finally, we have reached the end of our guide. Before concluding, let’s quickly summarize the essential points that we discussed on capitation in medical billing:
- Fixed capitation is a payment model in medical billing. In this, healthcare providers get a fixed amount per month for all services they provide to a patient in a month, rather than for individual services.
- It has three main types: primary, secondary, and global capitation.
- In this billing system, efficiency is more important than patient volume.
Medical billing is difficult, and for practices that have capitation contracts, the process becomes even more challenging. In-house billing teams usually don’t have the expertise or the tools to work with this capitation system. That is why many practices now choose to outsource medical billing services to an expert partner like MediBillMD.
