Capitation

Definition: According to the American College of Physicians, “capitation is a fixed amount of money per patient per unit of time paid in advance to the physician [or other health care provider] for the delivery of healthcare services.”¹ The Centers for Medicare & Medicaid Services (CMS) also refers to capitation as “pre-payment.”² The amount of money paid depends on the range of services provided, how many patients are involved, and the duration of time in which the services are provided.¹ The capitation rate is often set at PMPM (per member, per month) or PMPY (per member, per year). The rates used in capitation are determined using the local costs and average utilization of services; as a result, rates can differ from one part of the country to the other. Before a capitation agreement is made, a list of specific services that must be provided to patients is included in the contract. Examples of such services include:¹

• Preventive, diagnostic, and treatment services
• Outpatient lab tests, conducted either in-office or at a specified laboratory
• Injections, vaccinations, and medications administered in the office
• Health education and counseling services
   

Capitation was intended to create incentives for efficiency and prevention. The flat fee paid by the plan per member per unit time allows for emphasis on preventive care of all members, such as wellness visits and immunizations. The flat fee paid per member means that the provider is paid for members who may not be using the health system regularly and can redistribute those funds to focus on the health system “super-users” to prevent hospital readmissions and decrease those members’ overall costs. Capitation payments are meant to ensure focus is on all members with an emphasis on primary care and prevention.
 

How it relates to ACO/PCMH: Most PCMH programs that are sponsored by commercial insurers pay an enhanced PMPM payment to primary care physicians, often for care management/care coordination services. In the PCMH model, most practices also receive fee-for-service (FFS) payments and incentives for meeting quality metrics. A PCMH can be part of an ACO in which the ACO provides the organizational structure, with processes deployed to encourage high-quality and efficient services, improve value, meet quality metrics, and cost thresholds.
 

Involved organizations/oversight: CMS, individual states, and associated health plans are all involved with capitation.³ The Medicare Advantage program within CMS is a fully capitated model in which private health plans receive capitated payments to provide all Medicare services to the beneficiaries enrolled in the plan. Within a Medicare capitated model CMS, a state, and a health plan enter into a three-way agreement in which CMS and the state pay health plans to deliver comprehensive care to patients.³
 

Resources:

1. ACP. Understanding capitation. Available at: acponline.org/about-acp/about-internal-medicine/career-paths/residency-career-counseling/guidance/understanding-capitation
2. CMS. Capitation and Pre-payment. Available at: https://www.cms.gov/priorities/innovation/key-concepts/capitation-and-pre-payment
3. CMS. Capitated model. Available at: cms.gov/Medicare-Medicaid-Coordination/Medicare-and-Medicaid-Coordination/Medicare-Medicaid-Coordination- Office/FinancialAlignmentInitiative/CapitatedModel.html

Contributing author:

Chidiya Ohiagu, PharmD, BCPS
Franklin Primary Health Center Pharmacy, Inc.

Last reviewed and updated 1/31/24 by Amber Mercuro (Rollins), PharmD, BCACP