What are Capitation Reimbursement Models, Key Strategies?

February 16, 2021 - As the healthcare industry continues to move towards value-based care, more managed care organizations are using capitation reimbursement models to ensure quality of care and manage cost.

Compared to traditional fee-for-service models, which pay physicians for the volume of services provided, capitation models pay physicians a fixed amount per patient, per unit of time, whether or not the individual seeks care. Capitation payments are paid prior to care delivery and are determined by the range of services provided, as well as average utilization of those services and local cost of care.

Often, payers establish risk pools made up of a percentage of the capitation payment that is withheld from physicians until the end of the year. This shared-savings/shared-risk model incentivizes providers to lower costs by offering them the risk pool funds as a reward for reaching quality measures.

On the other hand, if the provider does not meet the payer’s value-based care measures—including thresholds for patient outcomes, patient safety, efficient use of resources, care coordination, patient engagement, and adherence to clinical guidelines—the payer keeps the funds.

Types of capitation models

There are three main kinds of capitation models: primary care, secondary care, and global capitation.

READ MORE: Key Considerations for Providers Thinking of Capitation Payments

Primary care capitation is a reimbursement model that refers solely to primary care clinical services. When a primary care provider (PCP) signs a capitation agreement, she agrees to provide a predetermined set of services. While the number and kind of services vary from plan to plan, most capitation models for primary care services include:

• Routine screenings for vision and hearing
• Preventative, diagnostic, and treatment services
• In-office health education and counseling services
• Injections, immunizations, and medications administered in-office
• Outpatient laboratory tests conducted in-office

Secondary care capitation models form a relationship between PCPs and secondary providers. Under this reimbursement model, secondary providers are given capitated payments based on the PCP’s enrolled membership. Services that make up secondary care include radiology, diagnostic imaging, physical therapy, and other services that are not provided by a PCP.

Lastly, global capitation reimbursement covers all services for a patient population. This fixed payment model allows providers to deliver patient-centered care in areas that lack primary care access.

How capitation is being used

Several payers and states have implemented capitation models into their healthcare systems. For instance, Maryland’s healthcare system operates under a global budget program known as the Maryland All-Payer Model. The state pays all hospitals a predetermined annual budget that covers inpatient and outpatient services provided to residents, regardless of their insurance plan.

A 2017 Health Affairs study uncovered that Maryland’s all-payer global capitation model reduced Medicare hospital costs by $429 million. Maryland hospitals also reduced potentially preventable complications by 48 percent and improved the all-cause readmission rate by 57 percent after implementing the payment model. 

READ MORE: PCPs Paid Under Global Capitation Deliver Higher Quality Care

Rural communities and providers can especially benefit from capitation programs due to the unique care landscape. In January 2017, CMS announced the Pennsylvania Rural Health Model. The program gives rural healthcare providers the flexibility to deliver tailored care to their community while also maintaining financial security by knowing how much they will be paid regardless of the volume of services delivered.

“Rural communities deserve access to excellent healthcare,” said Tammy Anderer, PhD, MSN, CRNP, chief administrative officer of one of the providers in the model, Geisinger’s Jersey Shore Hospital. “This model allows us to make new investments in patient care and introduce new care models that focus on the needs of our patients and communities. This includes going upstream and looking at community health problems and identifying ways to address these issues.”

Sara F. Adornato, CEO of Barnes-Kasson hospital, another provider taking part in the model, noted the extent to which this reimbursement model will benefit the hospital and the community.

“Barnes-Kasson, like many small rural hospitals, has been financially struggling for years trying to operate under the instability of a fee-for-service, pay-as-you-provide care system that does not support essential community health services in a low volume environment,” Adornato told RevCycleIntelligence.com at the time of the announcement.

“The Rural Health Model is giving rural hospitals like Barnes the opportunity to stabilize revenues under a set, predictable global budget while participating in a transformative effort to take a new, innovative look at what healthcare could be and should be in a rural community,” Adornato continued.

READ MORE: ACOs Plan to Move to Downside Financial Risk, Capitation Contracts

In August of 2020, CMS announced the CHART Model of reimbursement, a program that will give rural providers new funding opportunities to improve value-based care through capitated payments.

Strategies for success in capitation models

Brigham and Women’s Hospital’s Vishal S. Arora, MD, and Sachin H. Jain, MD, MBA, FACP, president and CEO of SCAN Group and Health Plan, explained key strategies providers must consider when they are looking to switch from fee-for-service to capitation models of reimbursement.

Arora and Jain noted in a Health Affairs blog post that while capitation models encourage organizations to put the primary care provider at the center of a patient’s care team, specialists need to be accountable for total costs of care as well. Arora and Jain recommended that organizations provide capitation payments to specialists based on the percentage of health plan premiums.

They also explained the importance of establishing networks of high-quality, cost-efficient providers when following a capitated payment model. The alternative model cannot support a large network of providers due to its capitated payments, so organizations must choose providers that will provide high-quality, affordable care.

Capitation models implemented during the HMO movement of the 1990s resulted in significant backlash from both providers and patients who did not like lack of choice.

Arora and Jain warned that backlash could occur today, as well. To avoid this, organizations will need to demonstrate clearly to patients the value and coordination benefits that come with narrow networks filled with high-quality, cost-efficient providers.

Finally, Arora and Jain noted ways organizations can mitigate financial risk under this alternative payment model. The experts said that organizations should set aside payments for expensive items, like specialty drugs and devices, in order to ensure they are able to cover those costs if complications occur in care delivery. Providers can mitigate risk by engaging stop-loss insurance.

As the industry continues to place emphasis on value-based care delivery, capitated payments may become more popular as a way to provide high quality, cost-efficient care to patients.