What are Capitation Payments?

Capitation payments are advance payments made to healthcare providers by a health insurance company. Typically, this approach calls for determining a fixed amount that is tendered to the provider on a monthly basis, with that amount subject to review on an annual or other regular basis. A health maintenance organization or HMO is one of the most common types of group health insurance plans that utilize this approach to reimbursing physicians for services rendered.

The idea behind capitation payments is to ensure that members of the healthcare plan have ready access to physicians when and as the need arises. At the same time, the physicians who participate in the arrangement have the benefit of knowing they will have at least a minimum amount of income for each calendar month. A third advantage to this approach is the ability to cap medical expenses, which in theory aids in preventing those costs from increasing at a pace that is ahead of the economy.

Providers use varying criteria for determining the amount of the capitation payments to each physician associated with the plan. One factor that is found in just about all situations is the range of services offered by each physician. Often, the number of plan members that are assigned as patients to that physician will also influence the amount of the monthly payment. It is not unusual for the HMO to also consider the standard and usual healthcare costs in the area where the physician is located.

While many physicians find that working with a health maintenance organization and receiving capitation payments works very well, others contract with the program and then choose not to renew once the initial contract is fulfilled. This is especially true when only a few local physicians participate in the plan and a large volume of patients are assigned to each of those physicians. As a result, the physician may be unable to provide proper care to other more lucrative patients and the practice begins to lose money.

In addition to capitation payments, participating physicians may also receive a bonus on an annual basis. Many HMOs establish what is known as a risk pool. This is simply an account that is funded by depositing an amount equal to a specified percentage of the payments tendered to participating physicians. If the HMO has a good year and turns a profit, those physicians receive a portion of that fund as a bonus. Should the healthcare organization fail to achieve profitability in any given calendar year, the funds in the risk pool are used to offset the loss and not for any type of bonus to the participating physicians.