Complete Guide to Capitation in Healthcare

It is no secret that the healthcare industry is undergoing constant regulatory changes. The biggest transition was when the fee-for-service model was changed to the fee-for-value model. This put providers in a frenzy, as they now had to focus on patient care and receive reimbursement accordingly. Capitation is another payment model that sets a fixed amount to be paid to providers. In this article, we will discuss capitation in healthcare and its advantages and disadvantages. 

What is Capitation in Healthcare? 

Capitation refers to the payment model in which a fixed amount is paid in advance to the provider per patient for each unit of time. According to this model, the healthcare provider receives capitation payments based on the number of patients enrolled in the plan. This is also known as the capitation rate or capitation premium (or cap). It does not depend on how many healthcare services patients receive at the time and remains the same for all patients, no matter how many services they receive. The main aim of capitation is to help healthcare organizations manage costs. 

Capitation rates are calculated using local expenses and the average service utilization. Many plans establish a risk pool as a portion of the capitation payment. The doctor can access the money in this risk pool at the end of the fiscal year. If the health plan is successful, the money is paid to the doctor. If it is financially unsuccessful, the money is kept to cover deficit expenses.  

While the fee-for-service model lays out payments to providers based on the number of services they provide, the capitation model incentivizes providers to focus on preventative care to avoid unnecessary procedures or services. In this model, providers must manage the cost of care for every individual patient as they are paid for each patient enrolled in the program. Capitation is composed of four components:  

  • A flat fee is paid in advance. 
  • For the provision of a specific number of services in a defined period.  
  • For a preset number of enrolled members.  
  • Whether the patients received care during this period or not.  

Capitation models are mostly used by accountable care organizations (ACOs), health maintenance organizations (HMOs), and other types of managed care organizations. It helps healthcare providers manage costs by setting a fixed upfront payment. They also focus on providing high-quality patient care to save resources. Thus, it helps reduce costs and improve patient outcomes.   

Types of Capitation Models in Medical Billing 

There are three common types of capitation models in medical billing: 


In this type of agreement, the insurer directly pays the providers for the services provided to the member.  


In this capitation model, a secondary healthcare provider (like a specialist or lab specialist) is paid out of the provider’s funds.  


Global capitation covers all services for a network population. 

Advantages of Capitation in Healthcare

Capitation in healthcare offer many advantages to patients, providers, and payers, including: 

Preventative Care 

Capitation models incentivize providers to focus on preventative care to avoid unnecessary treatment or care. This helps improve patient outcomes and reduces costs and strain on hospital resources. 

Reduces Costs 

It can help streamline administrative tasks for providers and claim processing and adjudication costs for payers. Thus, it helps reduce overall costs for both payers and providers.  

Financial Predictability 

Capitation models help predict finances for both providers and payers. Providers can predict their revenue and expenses, while payers can budget their expenses with this model. 


Under the capitation model, providers are more focused on providing preventative care, which reduces the need for redundant treatments or services. This helps save hospital resources and ensures proper utilization of healthcare services.   

Value-Based Care 

Capitation helps promote value-based care. As providers focus on improving patient outcomes, the quality of services and patient satisfaction increase. The focus goes from the quantity of services to the quality of services. 

Disadvantages of Capitation in Healthcare

Capitation in healthacre may decrease costs and help promote value-based care, but it also comes with its drawbacks, including: 

Financial Risk 

One major disadvantage of capitation is the fixed payment rate. If a healthcare service costs more than the fixed payment, the provider may face a loss, which is a concern for smaller practices or solo practitioners. This is why providers must manage the cost of care in capitation models. 

Under-use of Healthcare Services 

In capitation mode, a provider may be motivated not to use enough resources to provide the care the patient deserves to save on costs. This could mean the patient misses out on receiving quality care.   

Overuse of Healthcare Services 

The other extreme is that providers may start prioritizing quantity over quality to see more patients and increase their revenue. They might rush through appointments to maximize revenue but miss out on providing quality care. 

Risk Selection  

The need to see more patients and cut down on costs may end up influencing providers to avoid seeing patients whose treatments are expensive. This is called risk selection, and it prevents people from receiving the care they deserve. 


The capitation in healthcare aims to improve the quality of care, reduce healthcare costs, and increase accessibility to care. This makes it a favorable payment model among providers.   

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