What is the Definition of Capitation?

A Form of a Healthcare Payment System

Capitation is one form of a healthcare system.
Capitation is one form of a healthcare system. Adam Berry/Getty Images

Capitation refers to a form of a healthcare payment system.

In a capitation model, a health care provider or individual hospital is paid by the insurer (or another payer) a fixed amount per patient during a given period of time.

A Capitation System

An example of a capitation model would be an insurer/payer who would negotiate to pay a doctor $500 per year per person in a group. For 1,000 people, the insurer would pay the doctor $500,000 and the doctor would be expected to supply all services necessary to those 1,000 different people.

If one individual person (patient) actually used $2,000 worth of health care services, then that doctor would actually end up losing $1,500 on that particular patient. On the other hand, if another particular patient used only $10 worth of health care services, then the doctor would make a profit of $490 on that particular patient. Of course, in such a system, the main goal for the doctor is to keep as much of that capitated amount as possible.

In contrast to a capitation system would be a health care system where the provider is paid a fee for each service delivered. If a patient needed a CT scan, the insurer would pay for the CT scan, having nothing to do with how many other services or payments need to be made.

Benefits of a Capitation System

The benefits to capitation for a doctor or insurer are mostly the decreased costs of bookkeeping. In other words, doctors do not have to pay huge staffs of billing people, nor do they have to wait to be reimbursed for any specific services.

Their actual cost to care for their patients may decrease.

Drawbacks of a Capitation System

While there are several benefits of a capitation system to a doctor, there are few benefits of a capitation system to a patient. The detriment is that the doctor begins to make decisions about what care he will or won't provide because he will make more money by providing less care, a form of healthcare rationing.

The more care that a doctor provides to a patient, the larger the patient's health care bill will be. However, the doctor gets paid the same overall, regardless of how much or little work he does on a patient. Thus, the system includes the built-in incentive for the doctor to see as many patients as possible, rather than focus extra individual attention on a patient.

While a capitation system might not ordinarily be of interest to patients, it is becoming more so due to its inclusion in some of the healthcare reform models being discussed - in particular as it regards ACOs (Accountable Care Organizations).

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