Advantages & Disadvantages of Capitation Payments

Health insurance practices, terminology and plans can seem complex and confusing, but having a good general understanding is important to choosing the right plan for your business. Some insurance plans utilize the capitation system, where providers are issued payments per member rather than payment for services. These capitation payments are issued monthly or yearly and can impact how care is offered to patients. The advantages and disadvantages of capitation stem from the differences in how doctors are paid and the financial risks they incur when prescribing complex testing and treatment to patients.

HMO Vs. PPO

HMO is the acronym for health management organization, sometimes also referred to as a managed care organization, or MCO. HMOs provide medical services at a discounted rate because providers are paid per number of patients, rather than by service. When you have an HMO health insurance plan, that means you can receive coverage only for services within a particular medical organization's clinics and hospitals. Upon enrollment, you and your family members choose a primary care provider, who refers you to specialists or hospitals as needed. If you do not go through your primary care provider before seeing a specialist, services will not be covered. Also, there is no out-of-network coverage, so if you see a professional outside of your HMO network, you will pay 100 percent of the cost for services.

PPO is the acronym for preferred provider organization, sometimes also referred to as a point of service, or POS health insurance plan. PPOs develop a network of preferred providers and you can choose providers within the network or outside of the network. In-network providers are normally more affordable because your health insurance provider covers a greater percentage of the cost for services. You may choose a primary care provider, but you are not required to, and you are generally free to seek care from a specialist without a referral. Providers within a PPO network are paid through a fee-for-service system, instead of by the number of enrolled patients.

Companies Providing Capitation Payments

HMO insurance companies provide capitation payments to physicians and other providers on a monthly or yearly basis. PPOs do not provide capitation payments because they operate on a fee-for-service basis. Some employers offer both HMO and PPO options to employees, while others only offer one or the other. Medicare offers both HMO and PPO options, with a wide range of costs to the consumer. Some HMO plans offer capitation tiers to allow for treatment of more complex or chronic health issues in a responsible way, without undue financial risk to the physician.

Advantages of Capitation

There are advantages and disadvantages of capitation, just like in any health care payment system. Some of the advantages are intended to reduce costs and increase quality of care:

  • Managing a capitation system can be easier and more cost effective because the only thing to keep track of are the number of enrolled members. There is no need to use complicated billing codes or to fill out involved paperwork or claims. 
  • Cash flow is more predictable for providers, and members have more predictable health care costs. Budgeting is easier when you know how much money is coming in or going out. 
  • Preventative care is a strong focus because it is more cost effective for providers than treating complex and chronic health issues later. This could be better for members who might experience increased health over the long haul. 
  • Unnecessary interventions, tests and care are limited because physicians are looking to keep costs down in order to maximize their profits. Patients do not need to be as concerned about paying for extra tests or procedures that are not truly needed. 

Disadvantages of Capitation

While the capitation system has its advantages and can sometimes help to keep costs down, it is not without its faults. Some people have concerns about potential disadvantages:

  • Patient choice is restricted. If you love your doctor, but she leaves the network, you have no choice but to choose another primary care provider or pay out of pocket. You must also obtain a referral before seeing a specialist or undergoing a procedure. If your primary care provider disagrees with your concerns, you might be denied a referral, leaving you without the care you desire. 
  • The capitation system can sometimes encourage providers to take on more patients than they can realistically care for, in order to increase their salaries. This means that time with the doctor could become very limited and appointments could involve waiting longer than you'd like. It also means that providers are more likely to feel stressed and hurried as they rush from patient to patient. 
  • Providers may become stingy with care, choosing not to order potentially helpful tests and procedures in order to keep costs down and profits up. This leads to a stressful work environment for providers and can cause patients to suffer or feel helpless in seeking the care they need. 
  • Providers may be tempted to only accept healthier patients in order to keep costs down and profits up. Some capitated plans offer a tiered system that helps to reduce this likelihood, but the risk remains. This can leave patients without good options for receiving the care they need. 

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About the Author

Anne Kinsey is an entrepreneur and business pioneer, who has ranked in the top 1% of the direct sales industry, growing a large team and earning the title of Senior Team Manager during her time with Jamberry. She is the nonprofit founder and executive director of Love Powered Life, as well as a Certified Trauma Recovery Coach and freelance writer who has written for publications like Working Mother, the San Francisco Chronicle, the Houston Chronicle and Our Everyday Life. Anne works from her home office in rural North Carolina, where she resides with her husband and three children.